1-2 points is peanuts. This is a $120 stock, a 5% move takes it to
126. Even 130 is "only" an 8% move. There is the pesky problem that
126 is above the 52-week high, and so far since the downturn none of
the big names (INTC, SUNW) have managed to reach anywhere near the
52-week high in pre-earnings anticipation. However, MSFT is no
ordinary stock, so consider this analysis:
Suppose MSFT comes in at $0.88+, with a rosy-looking future and a
split announcement. This is 40% growth versus the year-ago quarter,
and raises the trailing earnings to $3.44. At the current 38 P/E,
this works out to a tad over 130.
You can be sure that everyone on the street can do this calculation
as well, including the poor saps that sold you your calls. If I
had sold the calls naked, I'm going to be falling all over myself on
Monday to get the stock at a price lower than 125. Even at 126 I
can still close my position with a gain, since you paid me a couple
of bucks for the calls. Oh, and if I sold any 130s naked, I'd be
getting pretty nervous as well, especially as the price rises to 125.
It gets worse for the bears: ORCL (#2 software company in the world)
is trading at a 40+ P/E even in this down market. If there's another
software company worth that multiple, it's MSFT, and a 40 multiple
will get you 137. So even sellers of 135 calls will be getting edgy.
Now for the bearish case. The danger with a so-so announcement of,
say, $0.84, isn't that the earnings themselves are so bad. After all,
$3.40 trailing earnings still works out to 129 at the 38 P/E. No,
the problem here is that at 0.84, you're only 33% over the year-ago
quarter. If the market reacts to this by cutting the P/E to say, 35,
you get 119. But that's being pretty generous considering that the
current market trend is downward, and everyone on the street knows
that this kind of earnings announcement from MSFT will send the
entire sector into the dustbin. The P/E would drop to 30 in a
microsecond and the ensuing vaccuum could suck MSFT down to the low
100s or worse.
IMHO it is absolutely essential that a 2:1 split be announced with
the earnings. This is the strongest signal management can send that
the 40% earnings momentum is sustainable.
I'm very confident that MSFT will hit the $0.88, and indeed $0.90
is very possible. This should be enough to propel MSFT into the
high 120s and hold it above 125, at least for a while. Whether or
not it can actually reverse the overall downtrend in equities is hard
to say, which is why even though I'm pretty confident about the
outcome, I'm going to hedge by (grudingly) letting some buyers have
part of my upside. |
