Sprint Earnings Preview: 2 Trades for Sprint Stock

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July has not been kind to Sprint (S) stockholders. In fact, S shares have plunged more than 20% in the past month, sending Sprint stock to fresh all-time lows and placing the stock in oversold territory. But Sprint has a chance next week to turn things around for stockholders when it steps into the earnings confessional after the close on Tuesday.

By the numbers, Wall Street is expecting a second-quarter loss of 8 cents per share from Sprint earnings. Revenue is seen arriving essentially flat at $8.69 billion. That said, subscriber growth will be the key driver for Sprint stock.

In the second and third quarters of 2014, Sprint was hemorrhaging customers. But despite the company’s overall lackluster performance in the fourth quarter, Sprint actually added about 170,000 subscribers. Furthermore, while analysts are concerned about the company’s weakening cash position, subscriber growth is expected to continue — and with Sprint announcing a new family plan to compete with T-Mobile (TMUS), the company is clearly committed to bolstering its subscriber base.

Still, Sprint’s past underperformance hasn’t won it many supporters on Wall Street. According to data from Thomson/First Call, only three of the 28 analysts following the stock rate it a “buy,” compared to 17 “holds” and eight “sell” ratings.

Elsewhere, short sellers are also betting heavily against S stock. As of the most recent reporting period, some 109 million shares of Sprint stock were sold short, accounting for a sizable 13.6% of the stock’s total float. While this float has little impact on a struggling S stock, a surprise earnings rally could spark a significant covering rally — just something to keep an eye on.

If short sellers are worried about an earnings-related rally from Sprint stock, the concern isn’t reflected in S’s options backdrop. Typically, short sellers will purchase call contracts as a way to hedge their bets against a rally. As you can see from Sprint’s weekly Aug 7 series put/call open interest ratio of 0.86, call open interest is not as high a priority as you would expect from a worried short contingent.

S Earnings IP 7-30-2015
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Overall, weekly Aug 7 series implieds are pricing in a potential post-earnings move of about 8.3%. This places the upper bound at $3.79, while the lower bound lies at $3.21. Technically speaking, resistance lies overhead at $4, while support resides near S’s all-time low near $3.20.

As such, there is some room to run higher before Sprint stock hits technical resistance, while support is right at the lower bound.

2 Trades for Sprint Stock

Call Spread: With little room for potential losses outside of expectations, and plenty of room to run higher should second-quarter growth come in better than expected, a contrarian play on Sprint stock looks rather appealing. Those looking to take a risk and bet against the grain might want to consider a monthly Aug $3.50/$4 bull call spread. At last check, this spread was offered at 11 cents, or $11 per pair of contracts. Breakeven lies at $3.61, while a maximum profit of 39 cents, or $39 per pair of contracts, is possible if Sprint stock closes at or above $4 when August options expire.

Put Sell: If you’re not confident in taking a contrarian stance, but don’t like the returns on a put spread, then a weekly Aug 7 series $3 put sell may be what you are looking for. At last check, the Aug 7 $3 put was bid at 8 cents, or $8 per contract.

The upside to this put sell strategy is that you keep the premium as long as Sprint stock closes above $3 when August options expire at the end of next week. The downside is that should S trade below $3 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $3 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/sprint-stock-earnings-preview-trades/.

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