There is quite a bit to like about home goods retailer Bed Bath & Beyond Inc. (BBBY) right now. The company is benefiting from a strong quarter in new home sales and lower gasoline prices, which has put more cash in consumer pockets despite the weak recovery.
After the close of trading tomorrow, Wall Street will find out just how strong a quarter BBBY had, as the company is scheduled to release its third-quarter earnings report.
Bed Bath & Beyond is expected to post a profit of $1.19 per share, compared to company guidance between $1.17 and $1.21 per share. Revenue is seen arriving up 3.6% at $2.97 billion. The company has a shaky history in the earnings confessional, matching estimates once, beating Wall Street guidance once, and missing the consensus estimate twice in the past four reporting periods.
BBBY’s weak fundamental history is likely the driving force behind the current lack of enthusiasm for the shares among the brokerage community. Specifically, Thomson/First Call reports that 22 of the 27 analysts following BBBY stock rate it a “hold” or worse, compared to just five “buy” ratings.
Furthermore, the 12-month consensus price target of $66 per share represents a sizeable discount to BBBY’s current perch near $75. With Bed Bath & Beyond likely putting in a better-than-expected third quarter, upgrades or price-target increases could be in the works following tomorrow’s report.
Another potential boon for BBBY stock lies within the short selling community. Short sellers have been beaten up during the past month, and the number of BBBY shares sold short has declined sharply, falling 20% during the most recent reporting period.
However, some 13.9 million shares of BBBY stock remain sold short, creating the potential for a short-covering rally in the wake of a positive earnings reaction.
Signs of concern from the short selling crowd started to appear in the options pits this week. Short-term calls have been the contract of choice for BBBY stock, with the weekly Jan 9 put/call open interest ratio falling to a reading of 0.77. That said pessimism still lingers in the monthly Jan/Feb series of options, with the put/call ratio hovering near 1.29.
Click to Enlarge Weekly Jan 9 implieds are pricing in a potential post earnings move of about 6.2% for BBBY stock. This places the upper bound at $79.85, while the lower bound lies at $70.15.
Technically speaking, a rally to the 80 region would push BBBY stock past its current short-term hurdle near 78, while a dip to the 70 area would push the shares below their 50-day trendline — potentially resulting in follow-through selling pressure.
BBBY stock’s strong price action combined with a pessimistic sentiment backdrop and the potential for a better-than-expected third-quarter earnings report would suggest that the shares are ripe for a potential contrarian play. For those willing to take the plunge, a Feb 75/80 bull call spread has quite a bit of potential.
At the close of trading on Tuesday, this spread was offered at $2.58, or $258 per pair of contracts. Break-even lies at $77.58, while a maximum profit of $2.42, or $242 per pair of contracts, is possible if BBBY stock closes at or above $80 when February options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned stocks.
