General Electric (GE) is scheduled to report Q3 results Friday morning, Oct 21st before the open. The options market is currently implying a 2% one day move which is a tad rich to its 4 qtr average one day post earnings move of 1.75% and below the 10 year average of 2.9%.
The smaller than expected movement is surprising when you consider Honeywell’s (HON) recent Q3 earnings and sales warning that shaved 7.5% off of the stock’s value on Oct 7th, from the FT.com:
Honeywell said it now expected third-quarter earnings to come in at $1.60 a share on sales of about $9.8bn. This compares with its previous EPS forecast of $1.67-$1.72 and sales estimates of $10bn-$10.2bn.
The company also lowered the upper end of its adjusted full-year earnings guidance to $6.60-$6.64, down from $6.60-$6.70.
“As we’re seeing across the aerospace industry, conditions are more difficult than anticipated in both the business jet OEM [Original Equipment Manufacturer] and after-market businesses,” said Thomas Szlosek, chief financial officer, in a call with analysts on Friday.
HON is up 1% today after their CEO went on CNBC’s Mad Money with Jim Cramer last night after issuing an 8k that offers a better than expected long term guidance:
Maybe just maybe GE’s management was watching closely, took note on what investors were most focused on, like weak aerospace, particularly business jets and offer commentary that will not surprise investors as HON did a couple weeks ago.
But it wasn’t just HON, in the last week or so we have gotten weak commentary from industrials Dover (DOV), PPG Industires (PPG) and Alcoa (AA), so longs in GE may want to tread lightly. And its not just weak end markets and geographies, but with 55% of GE’s sales coming from outside the U.S., the DXY’s (U.S. Dollar Index) 2% gains this month alone, and 4% gains since mid August should keep a lid on a meaningful raise to guidance.
GE is a reasonably priced stock, trading 19x expected 2016 eps (14% growth on 7% sales growth) and has a dividend yield of 3.2%.
Unfortunately, the chart is not giving us much, despite the stock desperately trying to hold $29 support level dating back to last Spring:
This is sort of a chose your own adventure in the near term. If the company is able to just come in line for Q3 and offer an upbeat outlook for Q4 then the stock should bounce back to at least $30 in my opinion. If they were to miss and guide lower than the stock will be below $27.
So here is the deal, if you were inclined to be long and play for a bounce, the at the money calls that expire next week are dollar and vol cheap. If that is the case for the calls, then the same could be said for the weekly at the money puts. Its a matter of conviction, but no matter what your directional view I suspect that the stock will be at least 1% higher or lower by this time next week. As always with long premium directional trades into events, you need to get a lot of things right to just break-even, magnitude of the move, timing and most importantly direction.
Bullish – If I were inclined to make a contrarian long play into the print, this is how I would do it:
Trade: GE ($28.95) Buy Oct 21st 29 calls for 30 cents.
Break-even on Oct 21st expiration:
Profits: above 29.30, up 1.2%
Losses: up to 30 cents between 29 and 29.30, max loss below 29, Risking 1%
Or
Bearish – If I thought GE were going to guide down than I think at the money puts look very attractive.
Trade: GE ($28.95) Buy Oct 21st 29 puts for 34 cents.
Break-even on Oct 21st expiration:
Profits: below 28.66, down 1%
Losses: up to 34 cents between 28.66 and 29, max loss of 34 cents above 29, Risking 1.2%