Two Options Trades 
Costco Wholesale Corporation (NASDAQ:COST)
and
Adobe Systems Incorporated (NASDAQ:ADBE) Calls 
Thursday, December 11, 2014

** OPTIONS TRADE 1: Buy the COST Apr 2015 145.000 call (COST150417C00145000) at or under $3.00, good for the day. Place a protective stop loss at $1.20 and a pre-determined sell at $5.00.

**OPTIONS TRADE 2: Buy the ADBE Apr 2015 70.000 call (ADBE150417C00070000) at or under $4.50, good for the day. Place a protective stop loss at $1.80 and a pre-determined sell at $8.00.

by Ian Harvey

December 11, 2014

Options Trade 1: Costco Wholesale Corporation (NASDAQ:COST)

Introduction

Costco Wholesale Corporation (NASDAQ: COST) whose stock is up 30 percent since its 2014 low of $109.50 in February, had a stronger-than-expected results for the first quarter of fiscal year 2015 (1QFY15). Although the company’s sales came in line with the analysts’ estimate, its earnings outperformed expectations.

Costco’s adjusted earnings for the quarter increased 16.7% year-over-year (YoY) to $1.12 per share, beating analysts’ estimate by 2.7%. This was the second consecutive quarter for Costco to beat the analysts’ earnings estimate, after missing it for four consecutive quarters. Therefore, it is expected to uplift the investors’ confidence in the company’s ability to sustain profitability.

Costco reported a 7% YoY growth in net sales to $26.28 billion for the 1QFY15. Although revenue growth was in line with the estimate, Costco’s comparable sales (comps) growth outperformed the analysts’ expectations. The company reported a 5% YoY growth in comps for the first quarter despite negative impact of gasoline price deflation and changes in foreign exchange rates.

During this quarter, the retailer said it would enter the Chinese market by selling its wares through Alibaba's online Tmall Global marketplace. That would allow Costco to introduce offerings to mainland China while outsourcing most of the related logistics.

After the report the stock traded up to $146.82 but has since fallen back to $140.25 presenting a great opportunity to enter this options trade.

Analysts Opinions

The company has been the subject of a number of research reports:-

Deutsche Bank - Buy, $147 price target

“COST produced another solid quarter with 1Q EPS growth YOY of 16.8 percent. The $0.03 beat ($1.12A vs. $1.09E) was good enough, in our view, as valuation and falling gas prices (therefore rising margins) led expectations higher heading into the print. We'll find out details on how much of the beat was driven by gas on the call, but note that below the line items negatively impacted our model by $0.03, making the core P&L stand out that much more. The combination of strong sales (most recently an ~8 percent core comp in November), MSD sq. ft. growth (200+ door pipeline ahead including operations in nine countries), and margin expansion (up 23 bps YOY ex. MFI) make COST unique and secures it a premium multiple, in our opinion.”

Credit Suisse - Outperform, $135

"COST delivered an impressive 4Q result, driven by strong top-line growth both domestically and overseas, gross margin improvement, and expense leverage. It remains one of the few conventional retailers that continues to gain share and grow traffic, as its business model is one of the least threatened by e-commerce. Membership income grew 7.3 percent year-over-year to $768 mn, helped by strong renewal rates (91 percent in US and Canada and 87 percent worldwide) and new member sign ups. The retailer announced plans to open 31 stores in FY15 (19 in the US and the remainder overseas)."

Guggenheim – Neutral

Analyst John Heinbockel noted that the EPS beat was fueled by “robust gas margins, which tend to be fleeting and shouldn’t carry the same multiple as ex-fuel EBIT growth.” Heinbockel felt margins would return to normal as the decline in oil prices slows. Heinbockel saw EBIT growth moderating to 14 percent in 2Q, 9 percent in 3Q vs 17 percent in 1Q due to foreign exchange.


Conclusion

Costco has been a strong performer so far this year, and the stock is basically priced for perfection right now. Consumer confidence has risen to pre-recession levels, and Wal-Mart and Target have also posted better than expected earnings reports. Costco should keep the stock moving higher, and there is plenty of bullishness attached to the stock.

Therefore, based on the facts above the following options trade is recommended…..


** OPTIONS TRADE 1: Buy the COST Apr 2015 145.000 call (COST150417C00145000) at or under $3.00, good for the day. Place a protective stop loss at $1.20 and a pre-determined sell at $5.00.

Options Trade 2: Adobe Systems Incorporated (NASDAQ:ADBE)

Introduction

Business software specialist, Adobe Systems Incorporated (NASDAQ: ADBE) is slated to slip into the earnings confessional after the close of trading Thursday afternoon to release its fourth-quarter earnings figures. Wall Street is anticipating a quarterly profit of 30 cents per share, but Creative Cloud subscription growth might be the real story that ends up driving direction for Adobe stock.

Back in September, Adobe forecast that fourth-quarter earnings would arrive between 26 and 32 cents per share, placing the consensus estimate near the high end of the company’s range. Creative Cloud subscriptions, which are a barometer of the company’s Cloud presence and digital revenue, are expected to rise to nearly 3.3 million, up from 2.8 million paid last quarter.

Revenue for the quarter is seen arriving at $1.06 billion, versus Adobe’s prior guidance for sales in the $1.025 billion to $1.075 billion range.

Actually expectations may be higher, however, given Adobe’s strong track record in the earnings limelight. Specifically, the company has bested Wall Street’s estimates in three of the past four quarters by an average of nearly 20%. Along those lines, EarningsWhisper.com reports that the fourth-quarter whisper number for Adobe stands at 32 cents per share.

Technical Details

Adobe Systems has a 52-week low of $53.93 and a 52-week high of $74.69. The stock has a 50-day moving average of $70.66 and a 200-day moving average of $69.77. The company has a market cap of $35.692 billion and a price-to-earnings ratio of 153.30.

Earnings

Adobe Systems last announced its earnings results on Tuesday, September 16th. The company reported $0.28 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.26 by $0.02. The company had revenue of $1.01 billion for the quarter.

During the same quarter in the previous year, the company posted $0.32 earnings per share. The company’s revenue for the quarter was up 1.0% on a year-over-year basis. On average, analysts expect Adobe Systems to post $1.24 EPS for the current fiscal year and $2.07 EPS for the next fiscal year.

Analysts Opinions

The positive sentiment is pervasive in the sentiment backdrop for Adobe stock. For instance, data from Thomson/First Call reveals that 12 of the 20 analysts following ADBE rate the shares a “buy” or better, compared to eight “holds” and no “sell” ratings. On the other hand, there is room for improvement, as the 12-month consensus price target of $80 represents a premium of about 12% to yesterday’s close at $69.85.

The company has also been the subject of a number of research reports:-

• Analysts at Jefferies Group initiated coverage on shares of Adobe Systems in a research note on Thursday, November 20th. They set a “buy” rating and a $83.00 price target on the stock.

• On the ratings front, analysts at Citigroup Inc. reiterated a “buy” rating on shares of Adobe Systems in a research note on Tuesday, November 18th. They now have a $89.00 price target on the stock, up previously from $86.00.

• Finally, analysts at Zacks reiterated a “neutral” rating on shares of Adobe Systems in a research note on Wednesday, October 15th. They now have a $64.00 price target on the stock.

Conclusion

The company is going through a pretty dramatic shift away from selling its software and toward a subscription-based cloud service. Subscribers have warmed up to the idea, and the company has been adding a nice number of new subscribers each quarter.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE 2: Buy the ADBE Apr 2015 70.000 call (ADBE150417C00070000) at or under $4.50, good for the day. Place a protective stop loss at $1.80 and a pre-determined sell at $8.00.



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