Guidance might be more important than quarterly results when Keurig Green Mountain Inc (GMCR) steps into the earnings limelight after the close tomorrow.
A slow start for the Keurig 2.0 prompted the company to issue conservative guidance last quarter, resulting in lowered expectations for this week’s fourth-quarter report. While GMCR should easily top Wall Street’s targets, rising coffee prices could throw a wet towel on the company’s guidance.
Keurig Earnings and Sentiment
For the record, the consensus is expecting a fourth-quarter profit of 78 cents per share from Keurig — well above the company’s previous guidance for earnings between 68 cents and 75 cents per share. Still, KMCR has a habit of besting Wall Street expectations, with Zacks data indicating that the company has topped the consensus estimate in each of the past eight quarters. It should come as no surprise then that EarningsWhisper.com reports a fourth-quarter whisper number of 86 cents per share.
Aside from whisper numbers, expectations for GMCR stock is quite mixed going forward. For instance, data from Thomson/First Call reveals that nine of the 16 analysts following Keurig stock rate it a “hold” or worse. Additionally, the 12-month consensus price target of $130.50 represents a discount to yesterday’s close at $154.50.
If Keurig can offer up a solid report tomorrow, it could allay analyst fears and attract a few upgrades or price-target increases from this stodgy bunch.
Options traders are also less than enthused with GMCR stock. Currently, the November/December put/call open interest ratio for GMCR arrives at 0.98, with puts and calls in near parity. This ratio changes little when we zero in on the soon-to-expire November options series, slipping to 0.97. Since speculative options traders typically buy calls heading into events such as earnings, the lack of call activity ahead of Keurig’s report has a decidedly bearish tone.
Click to Enlarge Overall, November option implieds for GMCR stock are pricing in a potential post earnings move of about 8.4%. This places the upper bound near $168, while the lower bound lies at $142. A dip to $142 would not be pleasant, but it would leave GMCR some cushion above support at $140, which is home to the stock’s 50-day moving average.
A rally to $168, meanwhile, would vault the shares into all-time-high territory.
2 Options Trades on GMCR Stock
The stock’s strong price action combined with a relatively low earnings hurdle and a pessimistic sentiment backdrop would suggest that GMCR is ripe for a potential contrarian play.
Bull Call Spreads: For those willing to take the plunge, a Dec $155/$165 bull call spread has quite a bit of potential. At last check, this spread was offered at $3.85, or $385 per pair of contracts. Breakeven lies at $158.85, while a maximum profit of $6.15, or $615 per pair of contracts, is possible if GMCR stock closes at or above $165 when December options expire.
Selling Puts: Alternately, if you aren’t completely sold on the bullish case for GMCR, you might want to consider selling banking on technical support and selling option premium. Specifically, a Nov $140 put sell stands a good chance of finishing out of the money. At the close last night, the Nov $140 put was bid at $1.70, or $170 per contract. With this trade, you immediately pocket the premium and keep it as long as GMCR stock trades above $140 through expiration at the end of the week. However, if GMCR trades below $140 ahead of expiration, you could be assigned 100 GMCR shares at a cost of $140 each for every put sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
