United Technologies (UTX) will report their Q4 results tomorrow morning before the open, the options market is implying about a 4.5% move this week, which is rich to the average one-day post-earnings move of about 2% over the last four quarters.
UTX caught my eye because of their 45% revenue exposure to Europe and Asia given the backdrop of slowing global growth and a brewing trade skirmish with China. The stock trades very near a market multiple just below 15x, despite analysts expectations for 9% eps growth in 2019 on 18% sales growth! If the company were able to offer guidance that is in line with current consensus, then I suspect the stock’s 11% gains from its 52-week low made late last month likely has some legs. But offering guidance that endorses 18% year over year sales growth is likely to be a very tall task given the lack of visibility UTX management must have given no shortage of global headwinds.
As for the stock’s bounce, it was rejected right where it was supposed to, at last month’s breakdown level to new 52-week lows:
The longer-term chart is not much more encouraging, the late November breakdown below the uptrend that had been in place from the early-2016 lows should now serve as important technical resistance, as it is also very near its declining 200-day moving average:
Regular readers know that I am really not in the mood to try to play for post-earnings pops, my sense is that until there is some sort of definitive trade deal with China, most U.S. multi-nationals who are relying on China and Europe to hit their 2019 growth targets will do well to offer investors cautious guidance. I also suspect that investors may shoot first and ask questions later.
For traders looking for what they deem to below expectations in the options market, for companies that can miss and guide down and see a mid to high single digit decline, UTX might fit the bill. If I were inclined to play for a guide down and a re-test of last months lows, I might consider the following trade idea:
UTX ($111.50) Buy Feb 110 / 100 put spread for $2
-Buy to open 1 Feb 110 put for 2.50
-Sell to open 1 Feb 100 put at 50 cents
Break-even on Feb expiration:
Profits of up to 8 between 108 and 100, with max gain of 8 at 100 or lower.
Losses of up to 2 between 110 and 108 with max loss of 2 above 110.
Rationale: this trade idea risks less than 2% of the stock price with a break-even down a little more than 3% in almost a month.