Monday, 12 July 2010

the start to earnings season

first a quick comment on $BP, interesting to see where the stock has retraced to, its knifed through the first fib retracement, next target technically would be 435p. The rumour today is that $XOM is going to be interested after talk that Apache would buy some Alaskan assets over the weekend. Overall though it does appear that the market is focusing on the "value" of the underlying assets, rather than liabilities. The question is whether the market comes back and has another look at the liabilities?

The Raven has spent a little time looking at upcoming earnings announcements, after the close we have Alcoa and CSX, which should be interesting. In general the Raven believes that stocks that trade generally strongly into earnings tend to beat estimates, however there doesn't tend to be much follow through, whereas a stock that is weak into earnings, and misses tends to see some punishment after the event. Again one has to pay attention to the volume profile running into earnings.

$AA, the whisper is that they are going to miss, however retail punter sentiment seems bullish it doesn't appear that the stock has taken too much punishment before the earnings, its residual returns are negative, on a weekly, monthly and quarterly basis, usually a negative sign for earnings. The Raven doesn't have a strong view where the EPS will actually come in, however he is biased to think that the stock will trade lower over the next week. EV/ebitda is ~15x, fwd p/e its cheap, but its not a pretty balance sheet, especially as capex seems to have outstripped cashflow over this cycle.

The stock is clearly going to be trading on earnings 2yrs out to the Raven, and it'll be interesting to see how the market reacts to any commentary from the company and how it guides.

Option implied breakeven move is approx ~6%. He's going to look to get short at $11 or better today in small size, and hopefully will be covering his short tomorrow morning at $9 (more likely if he's in the black it'll be 10.40ish, however he'll be sized to cover at $12.25 and it not destroy his July.

$CSX on the other hand looks like it should beat earnings and that the market is expecting that. That doesn't mean that it can't trade up on it. implied breakeven move ~4%. He'll look to pick up stock at $51-$50, depending on the tape. Again small size.

Its not pleasing to note that £BT have caved into the unions and given them a 9% pay rise for 3yrs, it seems the public are determined to live in a parrallel universe. Even though the stock is cheap (if you close your eyes to the disasterous pension liabilities, in which case its more like fair value, you really do have to wonder what is going through management's head? Is the firm going to be run for the benefit of its staff or perhaps for shareholders? novel thought. What % of revenue ends up as profit and what % goes to staff directly as comp, and what as pension? or £20.7bn of revenue;
profit of 1.7bn (8.2%) and £5bn to staff (25.1%)

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