HPQ – Buy Spreads Ahead of Hewlett-Packard Earnings

by Joseph Hargett | November 25, 2013 9:46 am

Hewlett-Packard (HPQ[1]) is slated to slip into the earnings confessional after the close of trading Tuesday night, and Wall Street is projecting a double-digit year-over-year decline in fourth-quarter HPQ earnings.

Currently, the consensus is projecting Hewlett-Packard earnings of $1 per share, down 13.8% from the same quarter last year. Revenue, meanwhile, is seen slipping 6.8% to $27.91 billion.

Most analysts are blaming HPQ’s decline on the rise of mobile computing, with consumers eschewing traditional PCs and laptops in favor of smartphones and tablet PCs. In fact, IDC data revealed that global PC shipments fell 7.6% year-over-year in the third quarter. The data analytics firm also projects a high probability of continued decline in worldwide PC shipments in 2014.

As such, many investors will be keeping a close eye on any revisions or changes to HPQ earnings guidance. Hewlett-Packard currently is forecasting a moderate revenue decline, with adjusted fiscal 2014 earnings seen arriving in a range of $3.55 to $3.75 per share. The consensus has its sights set on 2014 earnings of $2.66 per share.

Sentiment Ahead of HPQ Earnings

Weakness in PC shipments hasn’t affected optimism among the analyst community, however. According to EarningsWhisper.com, the current fourth-quarter HPQ earnings whisper number arrives at $1.03 per share — 3 cents better than the consensus. But, judging from the rest of HP’s sentiment backdrop, this is the extent of Wall Street’s optimism for the company.

For instance, the brokerage community as a whole is very reserved when it comes to Hewlett-Packard’s prospects. According to data from Thomson/First Call, HPQ stock has attracted just seven “buy” ratings, compared to 22 “holds” and four “sell” ratings. Furthermore, the current 12-month consensus price target for HPQ arrives at $25 — a discount to the stock’s close at $25.26 on Friday last week.

Elsewhere, options traders are not all that keen on HP’s prospects, but there is evidence that they might be coming around.

Currently, put open interest totals 76,652 contracts in the November/December series of options, compared to call open interest of 78,229 contracts. The result is a put/call open interest ratio of 0.98.

That said, HP traders will want to keep a close eye on this ratio, as it has fallen from its early November perch near 1.09. In other words, speculative options traders have been adding calls at a faster rate than puts heading into HP’s quarterly earnings report. With short interest accounting for a measly 2.26% of HP’s total float (or shares available for public trading), a continued rise in call buying heading into HP’s report could be a sign of smart money ahead of the event — as opposed to call buying as a hedge for short positions.

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Taking a closer look at options activity reveals that weekly November option implieds are pricing in a potential post-earnings move of about 7.2% for HPQ. This potential move places the upper bound near $27.07, while the lower bound lies at $23.45. From a technical perspective, the upper bound corresponds with technical resistance for the stock, while the lower bound arrives near former technical support and HPQ’s 10-week moving average.

How to Trade

Judging from HP’s sentiment backdrop, it would appear that weakness in the PC market is already priced into the shares. As such, any positive data out of Tuesday’s report could go a long way toward bolstering support for the stock — a development that some options traders appear to be preparing for.

As such, traders looking to take a position ahead of HPQ earnings might want to consider a December bull call spread.

Currently, the Dec 25/28 bull call spread has quite a bit of potential.

As of the close on Friday, this spread was offered at $1, or $100 per pair of contracts. Breakeven for this trade lies at $26, while a maximum profit of $2, or $200 per pair of contracts, is possible if HP closes at or above $28 when December options expire.

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

  1. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ

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