by Joseph Hargett | January 22, 2014 11:28 am
Consumer goods giant Procter & Gamble (PG) is scheduled to release its fiscal second-quarter earnings report this Friday, creating a potential opportunity for savvy options traders looking to make a buck off PG stock.
P&G, which still is in the midst of restructuring its overseas operations, is facing tough year-over-year comparisons after blowing past Wall Street’s estimates a year ago. Furthermore, sector peer Johnson & Johnson (JNJ) set the bar high yesterday by topping consensus earnings estimates by 4 cents per share.
For the record, expectations are for a second-quarter profit of $1.20 per share of PG stock, down from $1.22 per share in the year-ago quarter. Revenue is forecast to rise 0.9% to $22.35 billion from $22.18 billion. Due to continued restructuring — P&G is merging its Eastern and Central European units with the Western European unit and its Indian unit with its Middle East and Africa units — management has consistently downplayed its expectations for the second quarter, indicating that earnings could come in below Wall Street’s targets.
Since the company has been restructuring since 2012, much of the associated risk should already be priced into PG stock. As such, expect investors to key off P&G’s forward-looking statements — especially since the company has yet to touch its initial guidance for the year despite a poor first-quarter showing.
Additionally, P&G brought back A.G. Lafley as CEO to handle the restructuring project. Any hint at a successor could be a sign that restructuring is nearing an end and that profitability should be on the upswing.
Click to Enlarge Technically speaking, PG stock put in a solid performance in 2013, adding nearly 20% last year. Still, shares were laggards compared to their peers and the broader market.
JNJ stock, for instance, added more than 27% in 2013, while Clorox (CLX) rose more than 26%, and Kimberly-Clark (KMB) was up almost 24% last year. Furthermore, the S&P 500 Index rallied 30% in 2013.
On the bright side, PG stock still has room to run, with shares maintaining key support at their 10- and 20-week moving averages. Additionally, PG stock currently is perched on solid support in the 80 region, as well as its rising 52-week MA. Overall, Procter & Gamble hasn’t closed a week below its 10, 20-, or 52-week trendlines since July 2012.
PG stock also has room for growth within its sentiment backdrop. Checking in with the brokerage community, PG has attracted just 12 “buy” ratings, compared to 11 “holds” and one outright “sell.” The consensus 12-month price target for PG stock rests at $87.06 per share, representing a premium of 9% on current prices. This configuration leaves ample room for potential upgrades should any positive news emerge from the Procter & Gamble earnings report.
Options traders are less than enthusiastic when it comes to PG stock. Specifically, put open interest totals 136,096 contracts in the front two months of options, compared to call open interest of 107,632 contracts. The result is a put/call open interest ratio of 1.26 for the January and February series of options. Such a high reading heading into an earnings event suggests that options traders do not have high hopes for PG stock.
Digging a little deeper, we find that weekly Jan. 25 option implieds are pricing in a potential post-earnings move of about 2.75%. This places the upper bound of a post-earnings move near $82.21, while the lower bound lies at $77.79.
For those looking to trade PG options ahead of this week’s earnings report, there are two potential strategies.
First, if, like many investors, you are holding PG stock in your portfolio for its solid dividend (which currently yields 3% annually), a somewhat conservative Feb 22 70/75 credit spread, or bull put spread, could be in order.
This spread is bid at 34 cents, or $34 per pair of contracts. The maximum profit of the premium collected (34 cents) is retained as long as PG stock closes above $75 when Feb. 22 options expire. Meanwhile, a maximum loss of $4.66, or $466 per pair of contracts, is possible if PG closes at or below $70 at expiration. However, given the stock’s strong technical support, this outcome, while possible, seems unlikely if P&G holds its current course.
For those looking for a bit more risk/reward, a monthly Feb 80/82.50 bull call spread could be quite profitable on an upside surprise for PG stock. This spread was last offered at 90 cents, or $90 per pair of contracts. Breakeven for this trade lies at $80.90, while a maximum profit of $1.60, or $160 per pair of contracts, is possible if PG stock closes at or above $82.50 when Feb. 22 options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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