Cablevision Systems Corporation (NYSE:CVC) is set to release its first-quarter earnings report ahead of the opening bell on Monday, and all eyes will be on the cable provider and its bold strategy to court the growing “cord-cutting” demographic.
While Cablevision stock received a considerable boost following the collapse of the proposed merger between Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc (NYSE:TWC), CVC’s staying power may be judged on the performance and guidance of its cord-cutter targeted strategy.
Driven by high prices and bundles loaded with unwatched channels, cord cutters have turned toward online services like Netflix, Inc. (NASDAQ:NFLX), Hulu LLC and Amazon.com, Inc. (NASDAQ:AMZN) for their viewing entertainment — and Cablevision has decided to follow their lead.
Specifically, Cablevision has signed deals to provide access to Home Box Office, Inc’s. HBO Now (the only standalone service outside of Apple Inc.’s (NASDAQ:AAPL) AppleTV to do so) and Hulu, as well as a cord-cutter package with Internet access and access to over-the-air broadcast channels for minimal additional cost.
Ultimately, the proof will be in the proverbial pudding for CVC analysts, and Wall Street has been mum about whispered expectations, according to EarningsWhisper.com. Overall, the brokerage community is quite bearish when it comes to Cablevision’s prospects. Specifically, CVC stock has attracted just five “buy” ratings, compared to 10 “holds” and six “sell” ratings. Additionally, the 12-month consensus price target for CVC stands at $19 per share, a discount to yesterday’s close at $20.18.
Negativity is also rampant within the short-selling crowd, as some 59.4 million shares of CVC stock were sold short as of the most recent reporting period. In total, this wealth of short interest accounts for a hefty 26.5% of CVC stock’s total float, or shares available for public trading. Should next week’s earnings induce another sharp rally for CVC, we could see sizeable follow through buying in the form of a short squeeze.
Sifting through CVC’s open interest configuration we find little evidence of short-hedging activity. Typically, if short sellers are worried about a potential rally, they will buy call options as a way to limit their potential losses. Currently, CVC stock’s May put/call open interest ratio arrives at 1.47, with puts easily outnumbering calls among short-term options. Judging from this data, there appears to be very little, if any, hedging going on.
Click to Enlarge Overall, May option implies are pricing in a potential post-earnings rally of about 7.5% for CVC stock. This places the upper bound at $21.50, while the lower bound lies at $18.50. A rally could see CVC challenge resistance at $22, with follow-through buying potentially pushing the stock into multi-year-high territory. On the downside, a sell-off could undo all of last week’s gains, sending CVC back down to its prior trading range in the $18 region.
2 Trades for CVC Stock
Call Spread: Technically, CVC stock has performed quite well over the past several months, with the stock appearing to put in a bottom in the $18 region. Last week’s surge has put the stock near overbought territory, but a strong quarterly report and positive guidance could be just the spark needed to unwind penned up bearish sentiment and send CVC toward multi-year highs.
It’s risky, but if you are up for a contrarian play, a May $20/$22 bull call spread has considerable potential. At last check, this spread was offered at 60 cents, or $60 per pair of contracts. Breakeven lies at $20.60, while a maximum profit of $1.40, or $140 per pair of contracts, is possible if CVC closes at or above $22 when May options expire.
Put Spread: On the other hand, CVC stock may have exhausted its short-term buying power following last week’s rally. Furthermore, if the company’s guidance reveals any signs of turbulence or lagging uptake in its cord-cutter packages, it could provide enough reason for the shares to give back last week’s gains.
As such, traders looking to jump on the bearish bandwagon might want to consider a May $18/$20 bear put spread. At the close of trading yesterday, this spread was offered at 55 cents, or $55 per pair of contracts. Breakeven lies at $19.45, while a maximum profit of $1.45, or $145 per pair of contracts, is possible if CVC closes at or below $18 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.