by Joseph Hargett | February 25, 2014 11:40 am
Volatility is the name of the game when it comes to trading 3D Systems (DDD) heading into the company’s fourth-quarter earnings report this Friday. DDD stock has traded as low as $54.63 and as high as $80.60 during February while Wall Street digested 3D Systems’ updated fiscal 2013 and fourth-quarter earnings guidance and the company’s continued buying spree.
For traders with enough fortitude, volatile DDD stock has considerable potential.
On Feb. 5, 3D Systems basically pre-announced its full-year 2013 revenue results, saying it expects sales in the range of $513 million to $514 million. 3D Systems had previously guided to full-year revenue of $500 million to $530 million. The company also said it sees total fourth-quarter revenue growth in excess of 50% year-over-year.
3D Systems also cut its 2013 adjusted earnings estimate to a range of 83 to 87 cents per share from 93 cents to $1.03 per share due to higher spending on research, manufacturing, and marketing. For the fourth quarter, the consensus is forecasting earnings of 24 cents per share.
On the sentiment front, the brokerage community is offering up a mixed bag. Specifically, the earnings whisper for 3D Systems earnings arrives at 21 cents per share for the fourth quarter — 3 cents shy of the consensus. Elsewhere, the 12-month consensus price target for DDD stock arrives at $79 per share, representing a meager premium of only 3.4% to yesterday’s close.
There is a group of holdouts in the brokerage bunch, with data from Thomson/First Call revealing that DDD stock has attracted 16 “buys” compared to three “holds,” and just one “sell” rating. However, even these long-held opinions appear on the cusp of shifting, with an analyst at Bank of America/Merrill Lynch downgrading DDD stock to “underperform” from “buy” yesterday. Should more analysts follow suit, it could spell trouble for shares.
Bearish sentiment abounds elsewhere on Wall Street, too.
For instance, the number of DDD shares sold short jumped by 8% during the most recent reporting period. The resulting 16.6 million shares sold short now account for an impressive 17.4% of DDD stock total float, or shares available for public trading. While this wealth of short interest could provide fuel for a covering rally, DDD would need to shock these naysayers into buying back their positions, and this week’s “pre-announced” results seem unlikely to accomplish such a feat.
Turning to options activity on DDD stock, puts have quickly become the speculative contract of choice. Currently, there are more than 16,000 open put contracts in the February and March series of options, compared to call open interest of just 12,000 for the same period. Overall, the February/March put/call open interest ratio rests at 1.59, a figure that has risen sharply from a reading of just 1.03 on Feb. 11.
Since options traders typically have a bullish bias heading into events like earnings reports, this skew toward put options indicates a heavy degree of pessimism. Taking this logic a step further, the put/call open interest ratio for weekly February options (which expire at the end of this week) is no less bearish, coming in at 1.36. Clearly, speculative options traders are expecting a negative reaction from DDD stock in the wake of Friday’s report.
Click to Enlarge But how big of a move is being priced in? According to weekly February implieds, DDD stock is expected to put in a post-earnings move of about 7.7%. This places the upper bound near $81.35 and the lower bound near $69.65.
It is important to note that a potential post-earnings rally would fall well short of overhead technical resistance at the $82.50 area, which is currently home to DDD stock’s 50-day moving average. This configuration potentially limits any short-term follow-through buying.
Meanwhile, the projected downside move would place the shares below former round-number support at the $70 level, creating the potential for additional selling down to the next level of technical support at $65.
Those traders looking to jump on a potential post-earnings plunge for DDD stock might want to consider a March 70/75 bear put spread.
This spread currently is offered at $2.02, or $202 per pair of contracts. A maximum profit of $2.98 per share, or $298 per pair of contracts, is possible if DDD stock closes at or below $70 when March options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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