Struggling smartphone company BlackBerry Ltd. (NASDAQ:BBRY) will slide into the earnings limelight ahead of the open tomorrow morning to face a wealth of low expectations and downright bearish analyst outlooks.
Wall Street is expecting BlackBerry to post a loss of 4 cents per share in the fourth quarter. While this is an improvement from its loss of 8 cents per share a year ago, revenue is expected to plunge 18.7% to $793.7 million.
BlackBerry is in the process of re-imagining itself as a smartphone security firm, with heavy focus being paid to security software based on BlackBerry hardware. Judging from recent fundamentals, the strategy is having a positive effect.
In fact, the company has bested Wall Street’s targets in each of the past four reporting periods by an average of 87%.
Some analysts appear to be taking the turnaround seriously, with EarningsWhisper.com reporting a fourth-quarter whisper number of 5 cents per share profit.
But that’s about all the bullish sentiment the brokerage community has to offer. According to data from Thomson/First Call, BBRY stock has attracted just four “buy” ratings, compared to 20 “holds,” and 13 “sell” ratings. Additionally, the 12-month consensus price target of $10 rests just 7.7% above BBRY stock’s close at $9.28 on Wednesday.
Short sellers are also getting in on the act. As of the most recent reporting period, the number of BlackBerry shares sold short stands at 95.6 million, representing 19.8% of the stock’s total float. In the event of another positive quarterly report, these shorted shares could provide fuel for a short-covering rally.
If short sellers are concerned about a potential post-earnings rally from BlackBerry, it isn’t showing in the options pits. Specifically, the March/April put/call open interest ratio arrives at a middling 1.07, with calls in near parity with puts among short-term options. Typically, calls are more popular than puts heading into an event such as earnings, especially if short sellers are looking to cover their positions. As such, I would have expected a higher put/call open interest ratio as evidence of fear among short sellers.
Click to Enlarge Overall, weekly Mar 27 series implieds are pricing in a potential post-earnings move of about 6.4% for BBRY stock. This places the upper bound near $9.84, while the lower bound lies at $8.66.
A rally would leave BlackBerry well short of round-number resistance at $10, while a decline would breach support at $9 and send the stock to its lowest levels since October.
2 Trades for BlackBerry stock
Put Spread: The safe bet on BBRY stock is to follow the bearish consensus sentiment on the shares. Along these lines, an Apr $8/$9 bear put spread has plenty of potential.
At last check, this spread was offered at 34 cents, or $34 per pair of contracts. Breakeven lies at $8.66, while a maximum profit of 66 cents, or $66 per pair of contracts, is possible if BBRY closes at or below $8 when April options expire.
Call Spread: On the other hand, if BBRY can surprise the Street with positive earnings figures or strong guidance, the resulting post-earnings move could be bigger than implieds are pricing in due to short covering and/or bullish analyst activity. As such, those traders willing to take a risk might want to consider an Apr $9/$10.50 bull call spread.
At last check, this spread was offered at 48 cents, or $48 per pair of contracts. Breakeven lies at $9.48, while a maximum profit of $1.02, or $102 per pair of contracts, is possible if BBRY stock closes at or above $10.50 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
