The second dip was short lived and the real rally has begun. The worst is behind us although there could still be some retracements as we move higher. However, the market has moved into rally mode rather than rebound mode.
In theory, investing in LEAPS is a long-term proposition where we hold over earnings in anticipation of a long-term gain. LEAPS should be exited in the normal November rally.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
No specific news. Shares rebounded with the market and could make a new high this week.
Original Trade Description: February 11th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
Expected earnings April 27th.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great. The company reported Q4 adjusted earnings of $1.48 compared to estimates for $1.44. Revenue of $7.74 billion beat estimates for $7.57 billion. They guided for full year earnings in the range of $7.33-$7.43 per share, up from $6.37-$6.57. The FactSet consensus estimate was $6.66. The company said it planned to invest $2.5 billion in US capital projects and a possible expansion to its US facilities. Sales of Humira, Imbruvica, Lupron, Creon, Synagis, Kaletra, Sevoflurane and Duodopa all came in above expectations. Shares spiked $15 on the news.
The company's many new drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion.
AbbVie's drug Humira is expected to sell more than $20 billion in 2018 after a $18 billion revenue in 2017. The FDA has 10 FDA approved indications giving it a massive patient base. This is just one of AbbVie's billion dollar blockbuster drugs. AbbVie and Amgen reached an agreement on a biosimilar for Humira. Amgen can sell its copy in the US starting Jan 23rd, 2023 and several European countries on Oct 16th, 2018. Amgen will pay royalties to AbbVie for the marketing rights. Both parties canceled legal proceedings regarding existing patents. The marketing agreement grants "non-exclusive" right, which suggests AbbVie will repeat the same agreement with other companies and thereby guaranteeing future royalty streams.
AbbVie has declared war on the Gilead Sciences Hep-C franchise. The AbbVie drug Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.
Here is the key point for AbbVie. The company said non-Humira sales are expected to rise from $9.6 billion in 2017 to $35 billion by 2025. The company is launching 20 additional products by 2020 with at least 8 of them expected to generate more than $1 billion in annual sales. These drugs will focus on Alzheimers, womens health and Hepatitis C.
Update 3/4/18: AbbVie and Biogen removed the MS drug Zinbryta from the market to evaluate the drug's "complex and evolving benefit/risk profile." They said evaluating it in the current patient base would not be possible given the limited number of patients being treated. The companies are investigating several cases of brain inflammation and liver toxicity. The drug's removal will not impact profitability. Sales were only $12 million in Q4 and $53 million for all of 2017. Patients on the drug were told to remain on the drug.
Long Jan 2019 $120 LEAP Call @ $8.50, see portfolio graphic for stop loss.
CAT - Caterpillar Inc Company Profile
No specific news but shares rebounded sharply after the tariffs turned out to be weaker than expected.
Original Trade Description: February 11th.
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986.
Company description from FinViz.com.
CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.
The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.
CAT said sales for Q4 rose 35% on strong global demand for construction equipment. They reported earnings of $2.16 compared to estimates for $1.79. Revenue of $12.9 billion beat estimates for $11.9 billion. The company guided for 2018 earnings of $8.25-$9.16 and analysts were expecting $8.19. The CEO said demand remains strong thanks to rising oil prices, booming construction and a rapidly rising global economy. CAT reported before the open on Thursday and shares were volatile over the last two days. However, despite the volatility shares are only down about $2 from the pre-earnings close.
Expected earnings April 26th.
Given CAT's big rally over the last six months, it was no surprise to see the stock sell off sharply. However, shares found support at $142 and the 100-day average at $144.
The LEAP premiums are very high. We are going to have to use a spread to enter this position.
Update 2/18/18: CAT reported their rolling 3-month sales rose 34% globally. There was a 23% rise in North America. Resource segment sales rose 49%, construction sales +30%, energy and transportation rose 16%, power generation +8%, industrial sales +13% and oil and gas sales +27%. This company is in the sweet spot of the global economic boom. The report the rolling 3-month average to smooth out the big-ticket sales spikes from month to month.
Long Jan $160 call @ $14.48, see portfolio graphic for stop loss.
Short Jan $185 call @ $5.51, see portfolio graphic for stop loss.
Net debit $8.97.
CDNS - Cadence Design Systems Company Profile
No specific news but shares are trying to rebound with the market. They are currently fighting downtrend resistance.
Original Trade Description: February 18th.
Cadence Design Systems, Inc. provides electronic design automation software, emulation and prototyping hardware, system interconnect, and analysis worldwide. It offers functional verification, including emulation and prototyping hardware. Its functional verification offering consists of JasperGold, a formal verification platform; Incisive, a functional verification platform; and Palladium, a verification computing platform. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and multiple patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process. In addition, it offers custom IC design and verification products to create schematic and physical representations of circuits down to the transistor level for analog, mixed-signal, custom digital, memory, and RF designs; and system interconnect design products to develop printed circuit boards and IC packages. Further, the company provides design IP products consisting of pre-verified and customizable functional blocks to integrate into customer's system-on-chips; and VIP and memory models for use in system-level verification to model correct behavior of full systems interacting with their environments. Additionally, it offers services related to methodology, education, and hosted design solutions, as well as technical support and maintenance services. The company was founded in 1988 and is headquartered in San Jose, California. Company description from FinViz.com.
Cadence reported Q4 earnings of 39 cents that met estimates. Revenue of $501.7 million beat estimates for $497.9 million. Shares fell hard on the lacck of an earnings beat right in the middle of the market crash.
However, the company guided for the current quarter for earnings of 36-38 cents and revenue of $400-$510 million. The better news was the full year guidance for earnings of $1.50-$1.60 per share compared to 2017 full year earnings of 73 cents. That is a 100+% improvement.
Cadence is right on the edge of a product breakout cycle and should recover the prior highs in short order. The stock was crushed in the market crash and is starting to rebound with resistance at $39.65 and the 200-day average. A break over that level should trigger additional buying.
They do not have LEAPS so I am going with the August $40 call, which is reasonably priced for 6-months of time.
Update 3/4/18: Cadence and Imec Technology are testing 3nm and 5nm chips. These will be the smallest chips ever produced and could improve processing speeds by more than 100%.
Long Aug $40 Call @ $3.00, see portfolio graphic for stop loss.
ECA - Encana Corp - Company Profile
No specific news. Shares are trading sideways with oil prices volatile.
Original Trade Description: May 21st.
Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.
Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.
Production averaged 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long-term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.
They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.
With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap. Half their market cap is cash on hand.
JP Morgan initiated coverage with an overweight rating and $16 price target.
I am recommending two positions for Encana. I am recommending a January $12 call for $1.40 and a January 2019 $15 call, also $1.40. The short-term position is to capture the expected summer rebound in oil prices. The long-term position is acquisition insurance. It will capture any normal rise in price but also any acquisition announcement.
Oil prices typically peak in August and then decline into fall. If OPEC announces this week an extended production cut scenario through March 2018 as expected, prices could continue to rise into winter as global inventories decline.
Encana sold its Permian Basin produced water infrastructure to H2O Midstream. No price was given. This included over 100 miles of interconnected pipeline and 80,000 bpd capacity. H2O plans to double the pipeline to 200 miles and capacity to 140,000 bpd plus adding storage for 2 million barrels of produced water. The produced water can be reused in new fracing projects and reduces the cost of new wells.
Update 7/21/17: Encana reported earnings of 18 cents that beat estimates for 4 cents. Revenue of $1.083 billion beat estimates for $773 million. Production averaged 246,500 Boepd, a 9,200 boepd rise. Condensate rose 14% to 124,900 bpd. The margin per barrel rose 25% to $12.10. Recent wells with the newest fracking technology have been coming with production 20% higher than expected. The company has more than 11,000 "premium" drilling locations and thousands of non-core locations.
Update 10/21/17: At the investor day last week, Encana said they were targeting 25% compound annual growth in non-GAAP cash flow over the next five years and $1.5 billion in non-GAAP free cash flow. They are going to do this without any rise in commodity prices. They stressed their 23,000 potential drilling sites with 11,000 offering premiums returns of more than 35%. That included 3,450 in the Permian, 220 in the Eagle Ford, 500 in the Duvernay and 6,900 in the Montney. Most people have not heard of the Montney but that play has over 1,000 feet of pay with six zones of stacked production. Link to presentation slides
Update 11/12/17: Encana reported earnings of 2 cents that missed estimates for 5 cents. Revenue of $861 million beat estimates for $826.8 million. Production of 284,000 Boepd declined from 338,000 in the year ago quarter. The majority of the decline was a 29% drop in natural gas production. The decline came from hurricane impacts and third party curtailments of gas in western Canada. The company said it was firmly on track to hit its full year targets. Shares are holding at 8-month highs after earnings.
Update 1/15/18: The company reported that production rose 31% in Q4 and exceeded their 20% growth targets. They did this within their $1.8 billion capex budget. For 2018 the budget remains roughly the same with 70% targeted for the Permian and Montney. Encana produced 80,000 Boepd from the Permian in Q4. They are targeting 25-35% companywide production growth in 2018. They are expecting significant liquids growth from the Montney as they complete the two remaining processing hubs for natural gas. The company will issue 2018 guidance when they report earnings on Feb 15th.
Update 2/18/18: SocGen upgraded from hold to buy with a $14.80 price target. They called the recent pullback a buying opportunity. Encana guided for a 2018 capex budget of $1.85 billion and yearly production of 370 million Boe, up from 313,200 million Boe in 2017. That is an 18% rise over 2017. The company plans to be cash flow neutral in 2018 after overspending cash flow by 65% in 2017. The company also announced a $400 million stock buyback program which equates to 3.6% of outstanding shares.
Encana reported Q4 earnings of 12 cents that beat estimates for 10 cents. Production increased from 321,500 Boepd to 335,200 Boepd.
Update 3/4/18: Encana put in a request with the Toronto Stock Exchange to repurchase 35 million shares worth up to $400 million over the next 12 months. That equates to 3.6% of the outstanding shares.
Long Jan 2019 $15 call @ $1.40, see portfolio graphic for stop loss.
Long (2) Jan 2019 $15 calls @ .50.
Adjusted 2019 position (3 contracts) @ 80 cents each.
Long (3) Jan 2019 $15 calls @ $1.10.
Adjusted 2019 position (6 contracts) @ .95 each.
Previously Closed 1/16: Long Jan 2018 $12 call @ $1.50, exit $2.05, +.55 gain.
FLIR - FLIR Systems - Company Description
No specific news. Shares spiked above initial resistance at $50 on Friday.
Original Trade Description: February 11th
FLIR Systems, Inc. develops, designs, manufactures, and markets thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions worldwide. The company operates in six segments: Surveillance, Instruments, Security, OEM and Emerging Markets, Maritime, and Detection. The Surveillance segment provides enhanced imaging and recognition solutions for various military, law enforcement, public safety, and other government customers for the protection of borders, troops, and public welfare. This segment also develops hand-held and weapon-mounted thermal imaging systems for use by consumers. The Instruments segment offer devices that image, measure, and assess thermal energy, gases, electricity, and other environmental elements for industrial, commercial, and scientific applications. The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home monitoring applications. The OEM and Emerging Markets segment provides thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic systems; imaging solutions for the smartphone and mobile devices market; and thermal imaging solutions for commercial-use unmanned aerial systems. The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market under the FLIR and Raymarine brands. The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives threats for military force protection, homeland security, first responders, and commercial applications. The company was founded in 1978 and is headquartered in Wilsonville, Oregon. Company description from FinViz.com.
The short description is that FLIR makes night vision equipment for the military. They are the primary provider of these high tech night vision systems and they are very expensive. With the military budget being greatly expanded in 2018 and probably 2019, FLIR is going to be getting a lot more contracts for new equipment and for replacement equipment and parts.
For Q3, FLIR reported earnings of 52 cents that beat estimates for 48 cents. Revenue of $464.7 million rose 14.7% and easily beat estimates for $446 million. The surveillance segment revenues rose 7.6%, instruments rose 10.5% and OEM and emerging markets revenues rose 39.1%. Detection systems revenues rose 18.9%. The security segment sa revenues rise 16.5%. The marine segment was the slacker with only a 4.2% increase. Order backlogs rose 10.1% to $709 million.
The company guided for full year earnings of $1.83-$1.88 up from $1.81-$1.91 with revenue of $1.78-$1.83 billion.
They do not have LEAPS but we can buy the July calls very reasonably.
Update 2/11/18: Shares declined with the market. Earnings on Feb 14th. We were stopped out of our existing position on the big market drop on Tuesday. Support has held but the 50-day average at $48.60 looks like resistance. I am going to recommend we reenter the July $50 call ahead of earnings on Wednesday. The passage of the defense-funding bill should be beneficial for all the stocks in the sector.
Update 2/18/18: FLIR reported earnings of 58 cents that rose 11.5% and beat estimates for 56 cents. Revenue of $494.8 million missed estimates for $501.1 million. They guided for full year earnings of $2.05-$2.10 with revenue in the range of $1.73-$1.76 billion. Order backlogs rose 10% to $652 million. They declared a quarterly dividend of 16 cents payable on March 9th to holders on Feb 23rd.
Update 3/4/18: Caterpillar just announced a new $1,000 smart phone called the S61 that has a laser measurement tool, senses the air for toxic gases and has a thermal imaging camera made by FLIR. The camera lets you see images of people and other things in total darkness based on their heat signature. The phone is guaranteed against breakage in a 6-foot drop. It is also a complete Android smartphone. Simply amazing.
Long July $50 call @ $2.80, see portfolio graphic for stop loss.
GE - General Electric - Company Description
GE announced it was looking to sell its electrical engineering division because profits declined 45% in that area in 2017. They are also looking to sell their gas turbine business, healthcare IT division and others. The CEO reiterated his goal to sell $20 billion in noncore assets.
Original Trade Description: January 21st
General Electric Company operates as an infrastructure and technology company worldwide. Its Power segment offers gas and steam power systems; maintenance, service, and upgrade solutions; distributed power gas engines; water treatment, wastewater treatment, and process system solutions; and nuclear reactors, fuels, and support services. The company's Renewable Energy segment provides wind turbine platforms, and hardware and software; onshore and offshore wind turbines; and solutions, products, and services to hydropower industry. Its Oil & Gas segment offers surface and subsea drilling and production systems, and equipment for floating production platforms; and compressors, turbines, turboexpanders, reactors, industrial power generation, and auxiliary equipment. The company's Aviation segment designs and produces commercial and military aircraft engines, integrated digital components, and electric power and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment offers diagnostic imaging and clinical systems; products for drug discovery, biopharmaceutical manufacturing, and cellular technologies; and medical technologies, software, analytics, cloud solutions, and implementation services. The company's Transportation segment provides freight and passenger locomotives, and rail and support advisory services; and parts, integrated software solutions and data analytics, software-enabled solutions, mining equipment and services, and marine diesel and stationary power diesel engines and motors, as well as overhaul, repair and upgrade, and wreck repair services. Its Energy Connections & Lighting segment offers industrial, grid, power conversion, automation and control, lighting, and current solutions. The company's Capital segment provides industrial and energy financial services; and commercial aircraft leasing, financing, and consulting services. General Electric Company was founded in 1892 and is based in Boston, Massachusetts. Company description from FinViz.com.
GE has been having a hard time. The financial crisis killed GE Capital and forced them out of that business to drop their SIFI designation and government oversight. They bought Baker Hughes at almost the top of the oil market. Competition is flourishing in every sector. The prior CEO, Jeffrey Immelt left the company under a cloud. They are selling off unprofitable or low profit divisions but the stock just keeps falling. Shares are currently at a 7 year low.
However, while things have been rocky, the new CEO is determined to right the ship. Nobody reading this play description thinks GE is going under. They are a huge manufacturing company with assets in transportation, railroads, aerospace, power, energy, etc.
This is what it driving this recommendation. There are strong rumors and forecasts that GE could be split up into 3-4 companies in a massive restructuring program. Other divisions could be sold to reduce the overall management complexity. There is tremendous value in GE and the new CEO has pledged to unlock it.
With the stock at a 7-year low at $16, this is the target low for a large number of analysts. It could go lower but GE is now a strong value proposition. It is not likely to happen this quarter or even this year, but it will recover. The options are cheap and with earnings on Wednesday, there could be some positive surprises.
With GE in crash mode, I am also recommending a March $16 put. If the stock drops another couple of bucks post earnings, we could sell the put and further reduce our cost in the LEAP.
The LEAP options are cheap. Buy a couple contracts and put them in your "do not disturb" folder. Other traders think this is a good idea as well. More than 4,500 contracts were bought on Friday with another 4,700 contracts of the $20 LEAPs.
Update 1/26/18: The company disclosed a SEC investigation into a $6.2 billion charge for insurance reserves. The company also reserved for future charges of as much as $15 billion. The company posted a $10 billion loss including charges and said it was looking to sell $20 billion in assets. The company reaffirmed their 2018 guidance for earnings of $1.00-$1.07. That was significantly lower than the $2 Immelt had promised before he left in August. That $1 number contains a lot of charges and is not an adjusted number. We knew there would be volatility when we entered the position but we are looking well into the future. GE posted $122.1 billion in revenue in 2017. They are not going away and the new CEO is committed to making them more profitable and easier to manage.
Update 2/11/18: GE shares collapsed to $14.25 on Friday. We have a long March $16 put as insurance. They announced a 12 cent dividend payable April 25th to holders on Feb 26th. We could close the put for a gain on the assumption the market decline is nearly over but there is no guarantee. I did put a stop loss on the put to prevent it from turning into a loss.
Update 2/18/18: GE hired Citigroup to prepare a sales plan for their gas engine/generator business. The division could be worth $2 billion. The new CEO said in January he was looking to divest up to $20 billion in assets to make GE a leaner and more profitable business. The GE power division saw profits fall -45% in 2017 as sales of power plants and services fell sharply.
GE announced it was building the largest wind turbine ever built. The turbine, called Halidade-X, will be 260 meters (853 ft) tall and have individual blades more than 350 feet long. The device can generate 12 megawatts of power daily and power up to 5,000 homes. That is 45% more energy than any current turbine. GE will spend up to $400 million developing the turbine with the first unit demonstrated in 2019 and shipping the first production units in 2021. Windfarm engineers have found that it is simpler to build and connect several large turbines than dozens of smaller ones. They require fewer foundations and less complicated electrical connections to the grid.
Long Jan 2020 $18 LEAP Call @ $2.42, see portfolio graphic for stop loss.
Long Apr $14 put, entry .50, see portfolio graphic for stop loss.
2/20: CLosed Long March $16 put, entry @ 75 cents, exit $1.33, +.58 gain.
HPQ - HP Inc - Company Description
HP shares closed at a record high after announcing on Friday a cash tender offer for $1.75 billion in debt securities. They listed 7 different tranches of debt with about $6.5 billion currently outstanding with current interest from 2.75% to 6.0%. The tender deadline is March 22nd and settlement expected on April 5th. They are offering to pay an "early tender premium" of $30 per $1,000 face value.
Original Trade Description: January 28th
HP Inc. provides products, technologies, software, solutions, and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health, and education sectors worldwide. It operates through Personal Systems and Printing segments. The Personal Systems segment offers commercial personal computers (PCs), consumer PCs, workstations, thin clients, commercial tablets and mobility devices, retail point-of-sale systems, displays and other related accessories, software, support, and services for the commercial and consumer markets. The Printing segment provides consumer and commercial printer hardware, supplies, media, solutions, and services, as well as scanning devices; and laserJet and enterprise, inkjet and printing, graphics, and 3D printing solutions. The company was formerly known as Hewlett-Packard Company and changed its name to HP Inc. in October 2015. HP Inc. was founded in 1939 and is headquartered in Palo Alto, California. Company description from FinViz.com.
Expected earnings February 22nd.
Hewlett Packard, now HP Inc, saw its shares crash back to $9 in 2016 as Lenovo cornered the cheap laptop market and consumers were moving away from desktop PCs. That was a lifetime ago in the tech world. Since that cycle low, HP has reinvigorated itself and changed its business model. The company no longer competes in the cheap computer market. HP now sells top end PCs to compete with the Apple Macs and fully features Dell workstations.
The reinventing of HP has worked. According to IDC, HP's market share rose from 21,8% to 23.5% in the last quarter. Only three companies, HP, Dell and Apple, saw shipments rise in Q4. HP shipments rose 8.3% to 16.6 million, Apple shipped 7.3% more to 5.8 million and Dell barely made the list with a 0.7% rise to 11.1 million. Total PC shipments rose only 0.7% in the quarter, showing how dominant HP was in stealing market share. That was the first quarter where overall PC sales have risen in the last six years. The PC is coming back to life.
Analysts credit high speed gaming computers, crypto currency mining computers and stylish new models for the surge in market share. For instance the graphic below is the HP Envy All-in-One PC. This comes with Windows 10, 16GB, Core I7 Processor, 2TB hard disk and 256GB SSD, Nvidia GeForce GTX 950 video, QHD 4K video, dual band Wi-Fi, camera, microphone, HDMI input and output. The optional quad speakers makes this not only a PC but an entertainment center as well. This is not your father's PC. Base price $1,899.
HP's PC revenue rose 13% in 2017 to $9.1 billion with total shipments rising 6%. That was after a 12% rise in revenue in the prior quarter. Notebook revenues rose 16% on a 8% increase in shipments.
The printer business is also coming back from the dead. Printers generated 65% of the revenue and 30% of earnings. HP is buying Samsung's printer unit, which will expand the product line in multiple directions including mobile printers and 3D printers. The company is poised to announce a new 3D printer that prints metal components in 2018.
The company is expected to grow earnings 10% in 2018 with a 4% increase in revenue. Compared to other tech companies their PE of 13 is positively ridiculous when most companies are in the 203. 30s or even 100s.
HP shares are about to break out to an 8 year high over $25. This should trigger additional buying because everyone wants to own a winner.
Update 2/25: HP reported earnings of 48 cents that beat estimates for 42 cents. Revenue of $14.5 billion beat estimates for $13.5 billion. They guided for the full year for earnings of $1.90-$2.00, up from prior guidance of $1.75-$1.85. Personal systems revenue was up 15%, commercial revenue up 16% and consumer net revenue rose 13%. Total units rose 7%, notebooks +8% and desktops 6%. Printing revenue rose 14%, total hardware units rose 14% with commercial hardware units rising 73%. Shares rose to $23.22 in afterhours but faded $1 in trading on Friday.
Long Jan 2019 $25 call @ $2.13, see portfolio graphic for stop loss.
Long Jan 2019 $25 call @ 85, average cost now $1.49.
JPM - JP Morgan Chase Company Profile
JPM said they see a busy year in the Middle East with increased trading activity, IPOs and M&A driving profits. Spinoffs will accelerate along with private sector mergers. The bank said their teams were very busy trying to handle all the existing activity with more appearing every day. This bodes well for earnings later in the year.
Original Trade Description: March 4th
JPMorgan Chase & Co. operates as a financial services company worldwide. It operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management segments. The Consumer & Community Banking segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; residential mortgages and home equity loans; and credit cards, payment services, payment processing services, auto loans and leases, and student loans. The Corporate & Investment Bank segment provides investment banking products and services, including advising on corporate strategy and structure, and capital-raising in equity and debt markets, as well as loan origination and syndication; treasury services, such as cash management and liquidity solutions; and cash securities and derivative instruments, risk management solutions, prime brokerage, and research services. It also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies, and public and private investment funds. The Commercial Banking segment offers financial solutions, including lending, treasury, investment banking, and asset management to corporations, municipalities, financial institutions, and nonprofit entities, as well as financing to real estate investors and owners. The Asset & Wealth Management segment provides investment and wealth management services across various asset classes, such as equities, fixed income, alternatives, and money market funds; multi-asset investment management services; retirement services; and brokerage and banking services comprising trusts, estates, loans, mortgages, and deposits. JPMorgan Chase & Co. was founded in 1799 and is headquartered in New York, New York. Company description from FinViz.com.
Banks make money by acquiring deposits and paying minimum interest rates while lending the money out at higher rates. When interest rates rise the rates on the loans match the jump in rates but the interest paid on deposits creeps up at a slower rate. For a bank like JP Morgan or Citigroup, each quarter point rise in rates is worth hundreds of millions of dollars in interest. The Fed is expected to hike rates at least 3 times in 2018 and possibly 4 times for a full 1% increase. This is a goldmine for JP Morgan.
In the past, the Fed has always believed that the ideal interest rate is 2% above the core rate of inflation. With the core rate approaching 2% that means a 4% Fed funds rate, which equates to a lending rate for banks at about 6%. Since the banks are coming off a Fed rate of less than 1% and doing well at those levels, a jump to 2.25% by the end of 2018 would double their interest income.
None of this is really important for a short term option trade but investors buy stocks for the future. JPM has a fortress balance sheet and They stand to make billions from the Fed rate hike cycle. That means JPM is a buy today and we are going to jump in before they make a new high.
The Jay Powell testimony definitely increased the worries about interest rates and the market decline knocked JPM back to the 60-day average and gave us a buying opportunity. The Fed meets on March 20/21st and is expected to hike rates. As soon as this trade war focus fades the Fed's rate hike plans will come back into play.
On Feb 28th, the CFO raised the outlook on earnings saying pretax profits could rise by 17.5% annually over the next several years. He said pretax net income could rise to a range of $44-$47 billion over three years, up from $24 billion in 2017.
Expected earnings April 13th.
Long Jan $120 Call @ $7.60, see portfolio graphic for stop loss.
Optional: Short Sept $95 put @ $2.40, see portfolio graphic for stop loss.
Net debit: $5.20.
MCD - McDonalds Company Profile
No specific news. Shares have rebounded sharply from the downgrade on March 2nd. I wish I have recommended doubling down last week but the options were still expensive even after the big drop. Shares have $10 over the last week.
Original Trade Description: February 25th.
McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. Company description from FinViz.com.
McDonalds has revitalized their menu and now offers fresh burgers rather than frozen, all day breakfasts, inexpensive drinks, healthier sides and reasonable prices. This is not your father's McDonalds.
Same store sales in the last quarter rose 5.5%, which is unheard of for a fast food chain the size of McDonalds. The CEO said, "We're building a better McDonald's and more customers are noticing. Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business."
Their latest surprising innovation is food delivery. They have partnered with multiple mobile delivery services and business is booming. McDonalds said delivery orders were significantly larger than dine in or take out because people now realize they can order for parties, football games, family dinners, etc. They order multiples of everything and the average check is significantly higher than a dine in order.
They are also implementing mobile ordering and payment with the order. You just show up and pick up your meal and it is ready to go. No lines to pay, no waiting for your food. They will have mobile order/pay in more than 20,000 stores by the end of 2017. The CEO said they were also seeing higher check sizes of 1.2x to 2.0x when mobile ordering is used.
McDonalds said it was going to sell some of the McCafe beverages in supermarkets in early 2018 through a partnership with Coca Cola. The company also announced three new espresso drinks for its own stores. They are Carmel Macchiato, Cappuccino and Americano. They are going to rebrand the McCafe offerings with a new logo and packaging. They are rolling out new coffee makers to nearly all of their 14,000 stores.
A consumer research company said sales at McDonalds were soaring in states that had legalized marijuana. They said 43% of users were eating at McDonalds, 18% Taco Bell, 17.8% Wendy's and 17.6% Burger King in order to satisfy their munchies after smoking pot. A side effect of marijuana is increased appetite.
Jefferies upgraded McDonalds (MCD) saying the partnership with Uber Eats will continue to push sales higher. McDonalds has said their delivery orders have a higher average ticket than traditional on site orders. Jefferies raised the price target from $150 to $200. The company restarted its dollar menu in January and there are $1, $2 and $3 items on the menu. An example would be any size drink or cheeseburger for $1, McDoubles and small McCafe drinks for $2 and Happy Meals and triple cheeseburgers for $3.
In their Q4 earnings sales for all stores rose 8%, up from 7% in Q3. Same store sales rose from 2.7% to 5.5%. That was down slightly from Q3 at 6.0% but still very respectable. Starbucks only posted 2% same store sales and Wendy's 3.4%. Earnings per share rose 19%. Capex spending in 2018 will be $2.4 billion with the majority going to update 4,000 restaurants and update marketing signage. They plan to open 1,000 new stores in 2018.
We were stopped out of our prior position in the market correction. The decline in the stock has ended and shares are rebounding.
Update 3/4/18: McDonalds was hammered in the already weak market on worries the $1, $2, $3 value menu was off to a slow start. Shares lost $7.43 and the worst one-day dollar drop since 1972 and the worst percentage drop (-4.77%) since they became a publicly traded company in 1965. The decline knocked 52 points off the Dow.
RBC Capital Markets cut its price target from $190 to $170 and lowered their comp sales forecast to 1% from 3.5%. Factset is still expecting 3.8% growth. The RBC analyst said "deteriorating industry conditions" and "disappointing" sales from the new value menu drove the downward revision to sales forecasts. They also believe the new menu was detracting from higher margin products and it lacked the "hero" item necessary to resonate with value-conscious consumers.
Long Jan $170 call @ $8.52, see portfolio graphic for stop loss.
Optional: Short Jan $190 call @ $2.79, see portfolio graphic for stop loss.
Net debit $5.73. Maximum gain $14.27.
MRK - Merck & Co - Company Description
Merck and Eisai Co Ltd from Japan agreed to a partnership to develop and sell Eisai's cancer drug Lenvima, which is already approved in dozens of countries for multiple uses. The deal will develop Lenvima to treat several types of cancer alone and in combination with Merck's Keytruda. This will really help to broaden Merck's product offerings.
Original Trade Description: November 12th
Merck & Co., Inc. provides healthcare solutions worldwide. It operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The company offers therapeutic agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal and intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors, and melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment for dogs and cats; anthelmintic products; fluralaner products to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with Aduro Biotech, Inc.; Premier Inc.; Cancer Research Technology; Corning; Pfizer Inc.; AstraZeneca PLC.; and SELLAS Life Sciences Group Ltd. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey.
Company description from FinViz.com
Merck reported earnings of $1.11 compares to the $1.03 that analysts expected. Revenue of $10.33 billion beat estimates. The company guided for full year earnings of $1,.78-$1.84 up from $1.60-$1.72. Revenue guidance rose from $39.4-$40.4 billion to $40.0-$40.5 billion.
Shares were crushed after the company said it had pulled its European application for the cancer drug Keytruda. Sales of the drug nearly tripled to $1.05 billion where it has already been approved and are expected to continue to grow to $5 billion over the next two years.
The reason they pulled the European application was to modify a phase III trial to focus on "overall survival" or OS rather than short-term "progression free survival" or PFS. This pushed the trial end date out to early 2019. Overall survival is the holy grail of any cancer drug. It is one thing for cancer to grow slower and let the patient live a longer life but gaining another 6-12 months of life is a fleeting goal. Living out your normal life span is the target all drugs shoot for. By modifying the trial to focus on longer term benefits, the eventual drug approval will be worth more. If the short term drug is worth $10,000 per treatment, a drug that give you upir life back is worth 10 times or even a 100 times that amount.
Merck will refile the application when they have the new data but this is one drug with $3 billion a year in sales compared to their current $40 billion in overall volume. If they get the OS data they want, Keytruda could grow to $10 billion a year by 2022.
I believe this drop is a buying opportunity because the LEAP premiums are miniscule for a company with a $150 billion market cap and $40 billion in annual sales.
I am going to recommend two LEAPS because they are so cheap. Choose either one or buy both.
Update 12/3/17: Merck announced another $10 billion share buyback program and they increased their dividend to 48 cents.
Update 12/17/17: Merck said a late stage trial for its blockbuster drug Keytruda failed to meet the main goal of extending lives of patients with gastric cancer. The drug is effective in other forms of cancer. Shares declined slightly on the news.
Update 12/30/17: Merck said the drug Steglatro and the combination drug Steglujan, both for diabetes, had been approved by the FDA. These drugs are in partnership with Pfizer. Both will be available in January.
Update 2/5/18: Merck reported earnings of 98 cents that beat earnings for 94 cents. Revenue of $10.43 billion missed estimates for $10.49 billion. The company recorded a loss of $125 million as the result of the June cyber attack. Sales of Januvia, Keytruda and Gardasil beat expectations. The company guided for full year revenue of $41.2-$42.7 billion compared to estimates for $41 billion. They guided for earnings of $4.08-$4.34 and analysts were expecting $4.10. They announced plans to invest $8 billion in US capital projects over the next five years with $12 billion planned in total. They also announced bonuses for employees as a result of tax reform. Shares had been declining since the "lower drug prices" pledge by President Trump on Tuesday.
Update 2/18/18: On Saturday, Gilead announced it had won a reversal of a prior verdict that required a $2.54 billion payment to Merck because of a patent violation on a Hep-C drug. The court reversed an earlier court ruling. Merck said they would appeal because the ruling did not conform with the facts on the case. This could cause MRK shares to decline at the open on Tuesday.
Update 2/25/18: The company said it was buying the virus-based cancer drug firm Viralytics for $394 million. The company uses viruses to infect and kill cancer cells. In theory, it causes the cancer cells to rupture and die and it also increases the body's immune response. Viralytics is expected to have some breakthrough news in the field in Q2 so that will help our Merck position.
Long Jan 2019 $60 LEAP Call @ $2.38, see portfolio graphic for stop loss.
Long Jan 2020 $60 LEAP Call @ $3.90, see portfolio graphic for stop loss.
PGR - Progressive Corp Company Profile
Progressive priced the offering of $600 million in senior notes and 500,000 shares of Series B Fixed-to-Floating Rate Cumulative Perpetual Serial Preferred Shares. The shares were priced at $1,000 for a total amount of $500 million. These shares will accrue dividends at 5.375% through March of 2023. Settlement is expected on March 14th.
Original Trade Description: February 4th
The Progressive Corporation, through its subsidiaries, provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Its Personal Lines segment writes insurance for personal autos, and recreational and other vehicles. This segment's products include personal auto insurance; and special lines products, including insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles. The company's Commercial Lines segment provides primary liability, physical damage, and other auto-related insurance for autos, vans, and pick-up trucks, and dump trucks used by small businesses; tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses, and non-fleet long-haul operators; dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses; tow trucks and wreckers used in towing services and gas/service station businesses; and non-fleet taxis, black-car services, and airport taxis. Its Property segment provides residential property insurance for homeowners, other property owners, and renters, as well as offers personal umbrella insurance, and primary and excess flood insurance. The company also offers policy issuance and claims adjusting services; home, condominium, renters, and other insurance; and general liability and business owners policies, and workers' compensation insurance, as well as sells personal auto physical damage and auto property damage liability insurance in Australia. In addition, it offers reinsurance services. Company description from FinViz.com
The company reported Q4 earnings of 99 cents that rose 55% compared to estimates at 77 cents. Premiums written rose 22% to $6.8 billion. Expenses rose 19.6% to nearly $2 billion. That includes a 19.8% loss and adjustments expense, 16.5% increase in policy acquisition costs and 22% higher underwriting costs. The stock cratered after earnings from the new high at $58.25 to a 2-month low at $54. We were stopped out for a minor gain at $54.65.
Shares have held at that $54 level for the last week despite the market meltdown. As the high flying tech stocks and Dow industrials crash and burn we may be better off going back into a stock that posts steady gains without a lot of volatility. According to Zacks earnings estimates are rising.
Premiums are cheap relative to the high beta stocks. I am going with the ATM strike because the premium is only $1 more than the next higher strike. On a slow mover we do not want to start well out of the money.
Update 2/28/18: PGR shares exploded higher after the company reported premiums for January. Net premiums written rose 22% to 2.729 billion. Net premiums earned rose 18% to $2.689.6 billion. Net income attributable to Progressive rose 146% to $448.3 million. Policies in force rose 13% to 5,730 million. Direct auto policies rose 14% to 6.145 million. Property policies rose 27% to 1.579 million. Shares spiked $4 on the news.
Long Jan $55.00 call @ $4.50, see portfolio graphic for stop loss.
PYPL - PayPal - Company Description
No specific news. Decent rebound and closed over resistance at $80.
Original Trade Description: February 4th
PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com
PayPal reported Q4 earnings that rose 59% to 55 cents that beat estimates for 52 cents. Net revenue rose from $2.98 billion to $3.74 billion. Total payment volumes rose 32% to $131.45 billion. They guided for Q1 for earnings of 52-54 cents, compared to estimates for 54 cents. These were dynamite earnings but shares faltered after the weak guidance.
The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.
Paypal said payment platform Venmo was on track with expectations. The platform processed $9 billion in payment volume, a 93% YoY increase. Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.
In Q3 Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.
The company recently sold its credit card assets to Synchrony Financial (SYF) for $5.8 billion. The bank will become the exclusive issuer of Paypal branded credit cards. The company also raised its guidance for Q4 to 52-59 cents on revenue of $3.64-$3.7 billion. Prior guidance was 37-39 cents on $3.57-$3.63 billion. Paypal said they had been using 40% to 50% of their free cash flow to fund the credit card business. With the asset sale, they will continue to promote the cards and grow the business but it will be up to Synchrony to fund the credit expansion. This was a win-win for both companies.
In December Keybanc raised their price target to $90 saying the Venmo app was the preferred payment app for 76% of responders in a recent survey. They expect $75 billion in Venmo payments in 2018 and Paypal will see earnings rise 4 cents for every $10 billion.
We were stopped out of a prior position when Paypal collapsed after the Ebay earnings. The company announced plans to phase Paypal out of the EBAY network as a preferred payment processor by 2023. Investors did not listen to the entire story. The PayPal CEO said the Ebay transaction revenue was 13% of their total and was growing at only 4% per year. The other 87% of transaction volume was growing at 23% per year. PayPal guided for 2018 for 16% revenue growth and 25% earnings growth.
Shares declined to $76.50 to rest on the support of the 50/60 day averages. Horizontal support is $73.50. I am recommending we reenter a new position on Paypal because there is nothing wrong with the company. This selling has been increased because of the market drop. If we reenter a new position at the open on Monday we could be buying right at support.
Unfortunately, with Paypal at new highs last Wednesday, the LEAP options are expensive. I am going to recommend a combination position. We can sell an OTM put spread for about a $4 credit to reduce our cost in the call. Without a total market meltdown, PayPal should not decline below $70. I would be thrilled to be put the stock at that level if it did happen.
Long Jan $80 call @ $8.95, see portfolio graphic for stop loss.
Short Jan $70 put @ $6.15, see portfolio graphic for stop loss.
Long Jan $55 put @ $2.04, see portfolio graphic for stop loss.
Net Debit $4.84.
TEVA - Teva Pharmaceuticals - Company Description
Teva said it had successfully priced $4.5 billion in senior notes. This was upsized from the $3.5 billion initially announced. The various notes have maturities from 2022 through 2028. Shares are flat lining but holding over support at $18.50.
Original Trade Description: December 10th
Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic medicines and a portfolio of specialty medicines worldwide. It operates through two segments, Generic Medicines and Specialty Medicines. The Generic Medicines segment offers sterile products, hormones, narcotics, high-potency drugs, and cytotoxic substances in various dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments, and creams. This segment also develops, manufactures, and sells active pharmaceutical ingredients. The Specialty Medicines segment provides branded specialty medicines for use in central nervous system and respiratory indications, as well as the women's health, oncology, and other specialty businesses. Its products in the central nervous system area comprise Copaxone for multiple sclerosis; Azilect for the treatment of Parkinson's disease; and Nuvigil for the treatment of excessive sleepiness associated with narcolepsy and certain other disorders. This segment's products in the respiratory market include ProAir, ProAir Respiclick, QVAR, Duoresp Spiromax, Qnasl, Braltus, Cinqair/Cinqaero, and Aerivio Spiromax for the treatment of asthma and chronic obstructive pulmonary disease, as well as Treanda/Bendeka, Granix, Trisenox, Lonquex, and Tevagrastim/Ratiograstim products in the oncology market. This segment also offers a portfolio of products in the women's health category, which includes ParaGard, Plan B One-Step, and OTC/Rx, as well as other products. The company has collaboration arrangements with Attenukine, Procter & Gamble Company, and Regeneron Pharmaceuticals, Inc. Teva Pharmaceutical Industries Limited was founded in 1901 and is headquartered in Petach Tikva, Israel. Company description from FinViz.com
Teva is the largest generic drug manufacturer in the world. Unfortunately, that market place is becoming very competitive and the company has to reinvent itself to return to a profitable growth profile.
Fortunately, the company is taking action. They have been selling off noncore assets to pay down debt. They just installed a new CEO,Kare Schultz, and he took immediate action. On his second day on the job, he restructured the management team and said he would present a major restructuring plan in mid December. Last week, the stock jumped to a two-month high after news broke they were considering cutting 10,000 of their 57,000 workers in an effort to save $1.5-$2.0 billion a year.
Shares fell in early November after the company cut full year guidance for the third time and said they may sell shares to reduce their debt. In early December, they pulled back on the share sale idea saying they have no plans for a secondary offering in the near future.
I believe the worst is over. The reaction to the news over the last four months has been horrendous. Shares had fallen from $32 to $10. Since the new CEO took control, they have rebounded back to $16.
Because of the giant drop, the LEAP premiums are very reasonable. I am suggesting we take advantage of the los premiums and the potential for a share price recovery. I am recommending both the 2019 and 2020 strikes. This way we can take some gains in late 2018 and let the longer term bet ride.
Update 12/17: Teva announced on Thursday they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse on Friday.
Update 12/30/17: Teva said its BLA application for Fremanexumab as a preventive for migraine headaches had been granted a priority review designation by the FDA. There were two successful Phase III studies under the HALO program with patients with episodic migraine and chronic migraines.
Update 2/18/18: Teva shares exploded higher after Warren Buffet reported a new stake of 18,875,721 shares or roughly 2% of the company. Teva is now making a generic Viagra that is going to be a cash cow for the next several years and should help raise their stock price.
Long Jan 2019 $20 LEAP Call @ $2.10, see portfolio graphic for stop loss.
Optional: Long Jan 2020 $20 LEAP Call @ $3.70, see portfolio graphic for stop loss.
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