Micron (MU) will report their fiscal Q1 results tonight after the close. The options market is implying about an 8% move between now and Friday’s close, or about $3.50. With the stock at $43.50, the Dec 22nd weekly 43.50 straddle (the call premium + the put premium) is offered at $43.50, if you bought that and thus the implied move you would need a rally above $47, or a decline below $40 to make money. The stock has moved 8.4% one average over the last four quarters, with three of the moves being higher. The stock has moved about 6.5% the day following earnings over the last ten years.
Wall Street analysts are nearly universally bullish on shares of MU with 25 Buy ratings, only 4 Holds and No Sells with an average 12-month price target of $54. Credit Suisse’s Semi Analyst John Pitzer, a long time bull on the stock thinks the stock is a “compelling risk/reward” even up 100% on the year, and had the following to say in a note to clients on Dec 17th:
MU reports F1Q on 12/19 AMC. We expect F1Q Rev/EPS of $6.7bn/$2.46 WELL ABOVE Street of $6.4bn/$2.19, driven by inline bit growth and cost downs, but better than expected ASPs – specifically, DRAM/NAND ASPs up 8% q/q and flat q/q vs. our previous assumption of flat and down 2.5%. We expect F2Q midpoint Rev/EPS guided to $6.8bn/$2.60 WELL ABOVE Street
of $6.2bn/$2.00 with underlying DRAM and NAND ASPs flat q/q and down ~7- 8%. If current pricing trends hold, we would expect F2Q EPS ultimately b/w $2.75 and $3.00. We expect FY18 EPS estimates to increase from ~$8 to ~$11 – taking FTM EPS revisions over the last 12 months from +280% to +420%. We highlight the following especially relative to recent Memory Cycle concerns
Shares of MU are down about 13% since making a 17 year high in late November, briefly flirting with the nice round number of $50, but have rebounded a tad since bouncing off of the nice round number of $40 earlier in December:
This one could go either way, the cooling off of the stock over the last few weeks clearly speaks to lower expectations into tonight’s print. But the optimism for this quarter and for upbeat 2018 guidance from analysts like Pitzer make it clear that the analyst community are all on one side of the boat if in fact there was some sort of disappointment.
A beat and raise, as expected and the stock is likely back in the high $40s, in line with the implied move. An unexpected miss and guide down and the stock is easily below $40, outperforming the implied move.
So what’s the trade?
Bullish: If I were inclined to play for a move to the high $40s:
Trade Idea: MU ($43.50) Buy Dec 22nd 44 / 47 call spread for $1
Breaks-even at $45, max gain of $2 at $47 or higher, risk 1 to make 2 if the stock up in line with the implied move.
Bearish: If I were inclined to play for a miss and guide lower I would target a nasty break of $40 to the downside:
Trade Idea: MU ($43.50) Buy Dec 22nd 43 / 38 put spread for $1.25
Breaks-even at $41.75 offering profits of up to $3.75 down to $38, risking 1 to make 3
Protection: If I were long stock and looking to take profits in the new year I might consider a collar, selling an out of the money call to help finance the purchase of an out of the money put. This positioning would allow me to participate in some near-term upside, to a point, and offer defined risk downside.
Hedge Idea vs 100 shares long at $43.50, Buy the Dec 22nd 46 / 41 collar for even money
-Sell to open 1 Dec 22nd 46 call at 73 cents and
-Buy to open 1 Dec 22nd 41 put for 73 cents
Break-evens on Dec 22nd expiration:
-Gains of the stock up to 46, capped there. stock called away if 46 or higher, but you could always cover the short call to keep the long stock position in place.
-Losses of the stock down to $41, protected below.
Rationale: this hedge gives up potential upside to secure defined risk on the downside.