Today’s coverd call trade is to buy the stock at $35.00 and selling the WMB Nov 32 Calls for $3.30.
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Financial Horror Movie: NFLX Post Earnings 10.24.12
The massive implied volatility has more or less been realized since shares started to tumble after their all time high of $300 in July 2011, but what has caused this surge in volatility and does NFLX’s outlook justify said price gap.
In short, it really does all come down to NFLX’s consolidated global performance. Here the company guided to a net loss of $13 million to a slight profit of $2 million. The proverbial bell that rang at the top, considering hindsight is 20-20, was when the company decided to raise its monthly fees to subscribers in mid 2011. Since then, paid subscribers (international/domestic streaming and DVD) have fallen off along with every other metric.
As with any business, watching cash is key to gain insight if one is successful or not. In the case of NFLX, the latter has been favored for the company has been losing cash. In Q3 total cash was down $32 million. The net income line for Q3 may be deceiving for FCF (free cash flow) was down $20 million. FCF being the amount of cash generated by the business after taking into account cash required to properly grow said business. According to NFLX, “significant uses of cash in the quarter (relative to net income) were cash payments for content (in excess of the P&L expense), cash payments for PP&E (including cache boxes for our Open Connect program), and reductions in miscellaneous accounts payable and accrued expenses.”
While NFLX may be a questionable investment, it is definitely a great trading vehicle. Weekly IV was at 180% before the event, and it got down to 90% today… a massive crush. The weekly options also have nice bid ask spreads, even out to the OTM strikes. Short interest is at about 29% and the analyst community has 7 buys, 22 holds, and 8 sells on NFLX. The average price target for NFLX is about $72 and next year the analysts are expecting $0.82 in EPS.
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Data courtesy of Thinkorswim
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Leadership Matters 10.23.2012
Yahoo vs. Hewlett Packard
Comparing these two examples is a perfect example. The differences couldn’t be starker. While their challenges are somewhat different, how they are responding to them shouldn’t be. Hewlett is facing a secular change in their business. The desktop is being eclipsed by a more mobile tablet. Yahoo on the other hand has had difficulty determining how to monetize their business. Yahoo is one of the most visited sites on the web.
Meg Whitman vs. Marissa Mayer
Whitman and Hewlett have responded to their challenges with no real vision or strategy. Cost cutting and layoffs often need to happen in a company that needs to reinvent itself but it can’t be the only plan. Whitman has really not laid forth any vision for the future of HPQ. Neither has she been overly optimistic about a quick turnaround leaving shareholders and analysts in the lurk. Mayer on the other hand has shown some real moxie. When most new CEO’s come into a new situation they try to set expectations low and buy themselves time for a turnaround. A honeymoon period so to speak. Mayer has not done this.
She has been aggressive in going after key talent in order to try to build a management team capable of reinvigorating Yahoo. The recent conference call was amazing in the fact that she did not back down from sharing a vision for Yahoo. Rather than punt and say they are evaluating alternatives, she grabbed the bull by the horns and laid out her vision. She wants to focus the company on the user experience. She talked about the daily habits of users with regards to news, finance, email, and search. The company must focus on these in order to grow the company.
Vision Matters
Whether or not Yahoo can take on Google for search or figure out how to better monetize their users remains to be seen. But after the conference call you have a lot better feeling about Yahoo than the day before. Mayer instilled confidence. Whitman has done nothing like this. A company in a turnaround must have a plan and a vision that is articulated to investors and analysts. Yahoo and Mayer have done this. Whitman and HPQ have not. You will continue to see this reflected in their share prices going forward.
Caterpillar Inching Lower? (CAT, XLI, SPY) 10.23.2012
China, according to CAT, has continued to be weak…FXI. CAT went on to say that their finished inventory could have been lower if China was not slowing so fast. In the communist Chinese 5yr plan, they propose to accelerate some infrastructure spending and this has been compounded by monetary policy easing, anf for these reasons CAT expects a little bit of a pick-up here in the fourth quarter. “The sentiment on the ground from the dealers is a bit better, but in terms of translating it into sales, I’d say it hasn’t happened yet, so the selling season is sort of mid-February on, so probably not going to see much till then.” Mike DeWalt –Director of CAT IR
CAT CEO Douglas R. Oberhelman commented, “Well, we’ve had the easing expected to open almost all year. We are seeing increased levels of building permitting this year over last year. We’ve also seen in the last six weeks or so have major infrastructure effort announced. I suspect all of that is aimed after Presidential – leadership transition and most of that’s aimed towards spring of next year which is kind of a confluence of when is it around Chinese New Year, but if it happens it is going to happen then if it doesn’t we are in for another kind of slow year in 2013. But right now the cards in the hand are looking better than they have for a while. But I would emphasize nothing concrete from (water’s edge) yet.”
The muddling along thesis seems to be playing out, for CAT and XLI have been flat to lower. Oberhelman said, “We’re not expecting rapid growth, and we’re not predicting a global recession.” However, there is also the fiscal cliff and Europe to worry about
Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…
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S&P Emini Pivot Points for 10.23.2012
