The past three months since Micron Technology Inc. (MU) last reported earnings have not been kind to MU stock.
Shares have extended their losses to nearly 60% year-to-date, and MU has flirted with multi-year lows in the process. That said, Wall Street isn’t all that optimistic about the stock’s potential to recover anytime soon, especially given analyst expectations for the company’s fourth-quarter earnings report due Thursday after the close.
Diving into Wall Street’s expectations, Micron’s fourth-quarter earnings are expected to plummet 60% year-over-year from 82 cents per share to just 33 cents per share. Revenue is also expected to tank, arriving down nearly 16% at $3.56 billion.
There is some potential for fiscal 2016 guidance to provide some lift for MU stock, but given continued pricing woes for DRAM, the possibility seems remote.
Turning toward the sentiment backdrop, there are still quite a few bulls holding out hope for MU. According to EarningsWhisper.com, Micron’s fourth-quarter whisper number comes in at 34 cents per share, a penny better than the Street.
Furthermore, the brokerage community as a whole has doled out 24 “buy” ratings, compared to 10 “holds,” and just one “sell” rating. What’s more, the 12-month price target for MU stock rests at $25 — a whopping 67% premium to prices as of this writing.
Checking in with options traders, we begin to find a growing wariness of MU stock. Specifically, the October put/call open interest ratio for MU rests at 0.80, with calls only barely outnumbering puts among within the next month.
While this ratio edges lower to 0.74 for the weekly October 6 series (i.e. the options most affected by Micron’s earnings report), there is still a marked lack of enthusiasm when compared to the brokerage bunch.
Click to EnlargeOverall, weekly October 6 series option implieds are pricing in a potential post-earnings move of about 13% for MU stock. Based on Monday’s close, this places the upper bound at $16.39, and the lower bound at $12.61.
A post-earnings selloff would put MU in annual low territory once again, while a rally could see the shares finally breakout above their 50-day moving average.
2 Trades for MU Stock
Put Spread: The wealth of bullish sentient levied against underperforming MU is pushing me toward a contrarian trading stance on the stock. While low expectations appear to be priced into the shares already, any unexpectedly weak data or an earnings miss could prompt many of these bulls to finally abandon ship.
As such, I’m leaning toward a bear put spread ahead of the event. Traders wanting to bet against the bullish grain should consider an October $13/$14 bear put spread. At last check, this spread was offered at 25 cents, or $25 per pair of contracts. Breakeven lies at $13.75, while a maximum profit of 75 cents, or $75 per pair of contracts, is possible if MU closes at or below $13 when October options expire.
Call Sell: If you’d rather side with the bulls on MU, then an October $15/$16 bull call spread may be more your speed. At last check, this spread was offered at 30 cents, or $30 per pair of contracts. Breakeven lies at $15.30, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if MU stock closes at or above $16 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
