It’s time for auto parts retailer AutoZone, Inc. (AZO) to step into the earnings limelight, and, once again, AZO stock is facing a wall of worry despite strong fundamental and technical performance.
Diving into the numbers, Wall Street is anticipating a 13.3% rise in earnings to $8.24 per share, while revenue is expected to climb 5.9% to $2.39 billion.
Historically, AutoZone has met or bested Wall Street’s expectations in every quarter for the past two years. However, EarningsWhisper.com reports first-quarter whisper number of $8.23 per share for the company — a penny worse than the consensus.
In fact, pessimism is prevalent throughout the brokerage community. For instance, Thomson/First Call reports that 16 of the 25 analysts following the shares rate them a “hold.” Additionally, the consensus 12-month price target of $770 per share represents a meager premium of less than 1% to yesterday’s close.
Short sellers are also betting against AZO. As of the most recent reporting period, the number of AZO shares sold short rested at 2.3 million, representing a respectable 7.46% of the stock’s total float, or shares available for public trading.
What’s more, short sellers don’t appear to be worried at all about an AZO earnings rally, as call volume hasn’t risen to indicate potential short hedging activity.
In fact, AZO’s December/January 2016 put/call open interest ratio has instead risen during the past couple of weeks to perch at 1.11. This ratio moderates only slightly to 1.10 in the December series, with puts still easily outnumbering calls among options set to expire within the next month.
Click to Enlarge Overall, December option implieds are pricing in a potential post-earnings move of about 4% for AZO stock. This places the upper bound at $801.30, while the lower bound lies at $738.70.
Technically, AZO is currently pulling back to support at its rising 50-day moving average heading into next week’s quarterly report. This short-term retreat could be a buying opportunity for AZO bulls.
2 Trades for AZO Stock
Call Spread: With strong price action, solid fundamentals, and a wall of bearish sentiment, AZO has a near-perfect contrarian setup heading into next week’s quarterly report. Traders looking to bet against the grain might want to consider a December $770/$800 bull call spread.
At last check, this spread was offered at $11.67, or $1,167 per pair of contracts. Breakeven lies at $781.67, while a maximum profit of $18.33, or $1,833 per pair of contracts, is possible if AZO stock closes at or above $800 when December options expire.
Put Sell: For those more cautious traders, a deep out-of-the-money put may be just the way to bank a little profit while relying on technical support. At last check, the December $700 put was bid at $1.80, or $180 per contract.
As long as AZO trades above $700 through December expiration, traders will keep the premium received. If AZO trades below $700 ahead of expiration, however, traders could be assigned 100 shares of AZO stock for every put sold at a cost of $700 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
