Micron Technology, Inc. (MU) stockholders looking for some holiday cheer may be disappointed by what they find in their stockings next week when the company releases its fiscal first-quarter earnings report.
Unless the company can whip up some impressive guidance, MU stock is likely to extend its losses this year into the new year.
By the numbers, Wall Street is expecting Micron earnings to fall more than threefold in the first quarter, plunging to 23 cents per share from 97 cents per share from the same quarter last year. Furthermore, revenue is expected to drop 24.1% year-over-year to $3.47 billion.
On the sentiment front, EarningsWhipser.com is projecting a whisper number of 26 cents per share — three cents better than the consensus. This optimism is a bit disconcerting, given that Micron desperately needs a recovery in DRAM prices for the company to top expectations, and that’s one market that has been soft all year with no signs of recovery.
MU stock investors may also be looking for improved guidance from Micron, especially in light of the company’s recent acquisition of DRAM supplier Inotera.
In a move to control DRAM inventory and pricing, Micron announced Monday that it was acquiring the 67% of Inotera it didn’t already own. Inotera saw DRAM sales decline 18% last quarter, however, and this weakness could have a negative impact on Micron.
So far the analyst community appears to be overlooking these concerns. Specifically, Thomson First Call reports that 20 of the 33 analysts following MU stock rate the shares a “buy” or better. Furthermore, the 12-month consensus price target for MU rests at $20, a 42% premium to yesterday’s close.
Click to Enlarge Optimism is also prevalent with option traders. Currently, the December/January 2016 put-call open interest ratio for MU rests at 0.49, with calls doubling puts among options set to expire within in the next two months.
While this ratio comes in higher at 0.73 for the weekly Dec. 24 series, it is still far more optimistic that one would expect for a stock facing MU’s current situation.
Overall, weekly December 24 series option implieds are pricing in a potential post-earnings move of about 11% for MU stock. This places the upper bound at $16.05, and the lower bound at $12.95. A post-earnings selloff would put MU in annual low territory, while a rally would leave MU short of resistance at its 50-day moving average.
2 Trades for MU Stock
Put Spread: Excessive optimism toward an underperforming stock is a cornerstone of contrarian trading. While the longer term outlook for Micron may have a silver lining, the company has shown little in the way of turning things any time soon. As such, MU stock is set to suffer further due to elevated expectations as the weak hands continue to be shaken out of the mix.
With this in mind, I’m once again leaning toward a bear put spread ahead of Micron’s quarterly report. Those traders wanting to bet against the grain might want to consider a weekly Dec 24 series $13.50/$14 bear put spread. At last check, this spread was offered at 14 cents, or $14 per pair of contracts.
Breakeven lies at $13.86, while a maximum profit of 36 cents, or $36 per pair of contracts, is possible if MU closes at or below $13 when December options expire at the end of next week.
Call Sell: If you are currently holding MU stock, or if you’d rather not bet directly against the shares, then entering a call sell position, such as the weekly Dec 24 series $16.50 call, may better fit your outlook. Such a trade is especially useful if you already own MU stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $16.50.
At last check, this option was bid at 13 cents, or $13 per contract. A sold call allows you keep the premium as long as MU stock closes below $16.50 at expiration.
On the downside, if MU rallies above $16.50 prior to expiration, you could be forced to provide 100 shares at MU’s current market value for each call sold, which could be quite costly if you do not have enough MU stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
