Event: Texas Instruments (TXN) reports Q3 results tonight after the bell. The options market is implying about a 4% one day post earnings move, which is essentially in line with the 4 qtr avg one day move. It is important to note that the stock rallied nearly 8% in late July following a better than expected Q2 and rallied nearly 12% in late January following a better than expected Q4.
Price Action / Technichals: TXN has been a monster in 2016, up 31% year to date, and those gains were achieved prior to the stock’s 3 month consolidation since its Q2 gap in late July. The stock is now pushing up against the upper-end of the 3 month range of $66 to $72:[caption id="attachment_67500" align="aligncenter" width="600"] TXN 1yr chart from Bloomberg[/caption]
Taking a slightly longer term view, the stock has little overhead resistance as the next stop could be between $80 and $100, with $99.78 being its all time high in early 2000 (we’ll discus valuation in a bit). Fairly obvious intermediate technical support is at the June breakout level of $60:[caption id="attachment_67501" align="aligncenter" width="600"] TXN 2yr chart from Bloomberg[/caption]
My View into the print: TXN trades at 23.5x 2016 eps that is expected to grow 12%, and 21x 2017 eps expected to grow 10%, with flat sales in 2016 and only a 4% bump in 2017. The semiconductor space has been buoyed over the last year and half as a result of nearly $200 billion in m&a which TXN has largely stayed out of (Let’s make a deal). Recent rumors have suggested that competitor Qualcomm (QCOM) is considering a bid for NXP Semiconductor (NXPI), which would be the largest semi deal ever if near NXPI’s current enterprise value of $42 billion. There have been rumors that TXN might get in the mix to either make QCOM pay more, or keep the asset away from them. Given TXN’s current diversification away from smartphones and mobile devices, I suspect TXN’s market share in industrial and auto end markets is sound enough where they don’t have to make a large acquisition of this scale. To put their iPhone/iPad exposure in context, Apple (AAPL) is about a 10% customer of TXN.
So, beat and raise, stock breaks out with little overhead resistance, likely up in line with the implied move.
Q3 beat and mild guide down for Q4 and stock is likely back towards the recent lows near $66 in the coming days.
A Q3 miss and a Q4 guide down and the stock is in the low $60s in the next couple weeks.
So What’s the Trade?
Buy the TXN (71.75) Nov 70/75/80 call butterfly for 1.75
- Buy 1 Nov 70 call for 2.85
- Sell 2 Nov 75 calls at .60 (1.20 total)
- Buy 1 Nov 80 call for .10
Rationale – This trade targets the implied move to the upside and has a breakeven exactly where the stock is now. It risks 1.75 which is less than the implied move to the downside (about $3). Above 75 the trade’s profits trail off but it’s still profitable up to the 78.25 level. It’s intrinsic value is the same as its current mark to market value so vol coming in has no effect if the stock is unchanged.
Buy the TXN (71.75) Oct28th weekly 70.5/66.5 put spread for .85
- Buy 1 Oct28th 70.5 put for 1.05
- Sell 1 Oct28th 66.5 put at .20
Rationale – This is a binary trade targeting a move lower on the report. It offer’s risk reward of .85 to potential profit of 3.15 if the stock is near its recent (early Sept) lows following the report. That level is the lows since its consolidation near these highs, so it’s realistic to target on the downside. Of course, the entire trade could be worthless on a move higher in the stock as it expires on Friday of this week.
Estimates and Forecasts from Bloomberg:
3Q GAAP EPS est. 86c (range 85c-90c); co. forecast 81c-91c on July 25
3Q rev. est. $3.48b (range $3.48b-$3.54b), co. forecast $3.34b-$3.62b (July 25)
3Q gross margin est. 61.7% (range 61.0%-62.4%)
4Q GAAP EPS est. 80c
4Q rev. est. $3.30b