“Armchair Trader Series”  Recommendations
- Week Beginning -
Monday, November 27, 2017

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


Option Trade - VMware, Inc. (NYSE:VMW) Calls

Wednesday, November 29, 2017

** OPTION TRADE: Buy the VMW JAN 19 2018 130.000 CALL at approximately $3.70. Place a pre-determined sell at $7.40.

Also include a protective stop loss of $1.50.

The leading supplier of cloud services software VMware, Inc. (NYSE:VMW), will report earnings at tomorrow, Thursday, November 30, 2017, after the market closes. The consensus earnings estimate is $1.27 per share on revenue of $1.96 billion and the Earnings Whisper ® number is $1.29 per share. Investor sentiment going into the company's earnings release has 81% expecting an earnings beat.

In the last quarter, VMware's non-GAAP earnings of $1.19 per share beat the Consensus Estimate of $1.15, increasing 72.5% from the year-ago quarter. Revenues of $1.9 billion also topped the consensus mark of $1.89 billion and increased 12.2% on a year-over-year basis.

Year to date, VMware has outperformed the industry. The stock has returned 57.8% compared with the industry's gain of 36.7%.

VMware is seeing favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat. After all, analysts raising estimates right before earnings - with the most up-to-date information possible - is a pretty good indicator of some favorable trends underneath the surface for VMW in this report.

Short interest has decreased by 8.8% since the company's last earnings release while the stock has drifted higher by 20.0% from its open following the earnings release to be 25.2% above its 200 day moving average of $99.18.

Vmware, Inc. has a 52 week low of $76.81 and a 52 week high of $126.66. The company has a market capitalization of $51,790.00, a PE ratio of 34.99, a P/E/G ratio of 2.85 and a beta of 0.67. The company has a debt-to-equity ratio of 0.10, a quick ratio of 1.98 and a current ratio of 1.98.

Influencing Factors

VMware's strong product portfolio that includes NSX, AirWatch, vSphere and vSAN is the primary catalyst. The company continues to benefit from its strength in the virtualization and hybrid cloud market.

Moreover, strategic partnerships with the likes of Intel INTC, Samsung, Fujitsu, Pivotal, Google, and Microsoft will bolster its presence in hybrid cloud computing as well as the fast growing Internet of Things (IoT) market.  VMWare recently announced a partnership with SAP to speed up enterprise IoT implementations. Moreover, frequent contract wins and robust international sales are expected to drive results.

Further, acquisitions such as that of Wavefront will boost VMware's cross-cloud service providing abilities. Additionally, the planned divestiture of the vCloud Air will aid the company's focus on the core business.

VMware has seen a return to accelerating revenue growth this year, surpassing analyst estimates. After posting just 8% y/y growth in FY17 (on $7.1 billion in revenue), VMware grew at 9% and 12% in Q1 and Q2 of this fiscal year (FY2018), respectively. Q2 revenues were particularly strong at $1.90 billion, surpassing analyst consensus of $1.88 billion, driven by 14% y/y growth in license revenues.

Against a backdrop of an expensive market, VMware is an excellent mission-critical IT software company. While it's true that the company's ~48x P/E and 50% rise year to date doesn't make it look like a value stock, VMware is generating massive free cash flow - $2.3 billion in the trailing twelve months, or a 18x EV/FCF multiple, representing a 5.5% FCF yield.

Earnings are growing at an even faster pace than revenues, as the company is driving earnings growth as well as margin expansion. The company earned $334 million in GAAP net profits in Q2 (17.6% net margin), up 26% y/y versus $265 million (15.6% net margin) in the prior year's Q2. This translates to EPS of $1.19, a four-penny beat over consensus of $1.15. When considering the pace of VMware's earnings growth, its elevated P/E multiple is easier to grasp.

Vmware announced that its Board of Directors has initiated a stock repurchase plan on Monday, August 14th that authorizes the company to buyback $1.00 billion in outstanding shares. This buyback authorization authorizes the virtualization software provider to reacquire up to 2.5% of its shares through open market purchases. Shares buyback plans are often a sign that the company’s management believes its shares are undervalued.

Analysts and Hedge Funds Opinions

Vmware, Inc.‘s stock had its “buy” rating reissued by analysts at Stifel Nicolaus in a report issued on Monday. They currently have a $150.00 price objective on the virtualization software provider’s stock, up from their previous price objective of $118.00. Stifel Nicolaus’ target price indicates a potential upside of 20.75% from the stock’s previous close.

Also, several other equities analysts have recently commented on the company…..

  • Bank of America Corporation increased their price target on Vmware from $125.00 to $148.00 and gave the company a “buy” rating in a research note on Monday.
  • Robert W. Baird set a $115.00 price objective on Vmware and gave the stock a “buy” rating in a research note on Monday, August 14th.
  • Berenberg Bank reaffirmed a “hold” rating and set a $94.00 target price on shares of Vmware in a research note on Tuesday, August 29th.
  • Zacks Investment Research cut Vmware from a “buy” rating to a “hold” rating in a research note on Friday, September 22nd.
  • Robert W. Baird reaffirmed a “buy” rating and set a $125.00 target price on shares of Vmware in a research note on Wednesday, October 4th.
  • Finally, Morgan Stanley reaffirmed an “overweight” rating and set a $123.00 target price (up previously from $115.00) on shares of Vmware in a research note on Wednesday, September 27th.

Fifteen equities research analysts have rated the stock with a hold rating and seventeen have issued a buy rating to the stock. The stock currently has a consensus rating of “Buy”.

Institutional investors that have recently made a change to their positions in the stock….

  • Wells Fargo & Company MN raised its position in Vmware by 6.3% during the third quarter. Wells Fargo & Company MN now owns 1,792,367 shares of the virtualization software provider’s stock valued at $195,708,000 after purchasing an additional 105,543 shares during the period.
  • Twin Capital Management Inc. purchased a new stake in Vmware during the third quarter valued at approximately $3,505,000.
  • Dai Ichi Life Insurance Company Ltd raised its position in Vmware by 5.9% during the third quarter. Dai Ichi Life Insurance Company Ltd now owns 25,859 shares of the virtualization software provider’s stock valued at $2,824,000 after purchasing an additional 1,446 shares during the period.
  • Finally, Achmea Investment Management B.V. raised its position in Vmware by 2.1% during the third quarter. Achmea Investment Management B.V. now owns 39,204 shares of the virtualization software provider’s stock valued at $4,276,000 after purchasing an additional 803 shares during the period.

Harvey’s Options Volatility Indicator

Summary

VMware has returned to accelerating revenue growth in 2017 after years of relatively flat performance.

The company has successfully pivoted its traditional on-premise data-center offerings to emphasize hybrid cloud deployments.

VMware has generated impressive earnings and cash flow growth as well.

It's in the unique position of being a large legacy vendor that can still gain traction with new customers.

VMware’s software business makes it a high-margin, capital-light operations with plenty of opportunities for profit expansion, and the company looks like a winner.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the VMW JAN 19 2018 130.000 CALL at approximately $3.70. Place a pre-determined sell at $7.40.

Also include a protective stop loss of $1.50.


Option Trade - Thor Industries, Inc. (NYSE:THO) Calls

Monday, November 27, 2017

** OPTION TRADE: Buy the THO DEC 15 2017 140.000 CALL at approximately $3.70. Place a pre-determined sell at $7.40.

Also include a protective stop loss of $1.50.

Thor Industries, Inc. (NYSE:THO), a maker of RVs, reports late today, and EPS is seen rising 21% to $1.80, as revenue grows 14% to $1.95 billion.

Thor has topped earnings estimates in seven of the last eight quarters. Over the last two quarters, Thor posted earnings beats of 15.90% and 12.83%, respectively.

The company is one of the largest manufacturers of recreational vehicles in the U.S., and based on our current consensus estimates, the company is set to expand.

The company has been boosting production capacity to meet surging demand, and investors are also expecting greater needs for temporary housing in areas recently hit by hurricanes.

Shares of Thor have soared over 30% since the start of the year, which crushes the S&P 500's 12.67% average. What's more, the company's stock price surged over 23% in the last 12 weeks alone.

Thor has a debt-to-equity ratio of 0.09, a current ratio of 1.51 and a quick ratio of 0.92. The firm has a market capitalization of $6,910.00, a PE ratio of 18.58 and a beta of 1.42. Thor Industries has a 12-month low of $86.27 and a 12-month high of $138.07.

Analysts and Hedge Funds Opinions

Robert W. Baird reiterated their buy rating on shares of Thor Industries recently. The firm currently has a $136.00 target price on the construction company’s stock.

Also, several other equities analysts have recently commented on the company…..

  • Citigroup Inc. increased their price target on Thor Industries from $118.00 to $146.00 and gave the company a buy rating in a research note on Monday, October 2nd.
  • Zacks Investment Research raised Thor Industries from a hold rating to a buy rating and set a $122.00 price target for the company in a research note on Tuesday, September 5th.
  • Aegis initiated coverage on Thor Industries in a research note on Monday, September 11th. They set a hold rating and a $113.00 price target for the company.
  • Finally, Canaccord Genuity reaffirmed a buy rating on shares of Thor Industries in a research note on Friday, September 22nd.

One analyst has rated the stock with a sell rating, four have assigned a hold rating and nine have issued a buy rating to the company. Thor Industries presently has an average rating of Buy and an average price target of $123.08.

Institutional investors that have recently made a change to their positions in the stock….

  • Sit Investment Associates Inc. increased its position in Thor Industries by 26.9% during the third quarter. Sit Investment Associates Inc. now owns 37,600 shares of the construction company’s stock worth $4,734,000 after buying an additional 7,975 shares during the last quarter.
  • Hancock Holding Co. increased its position in Thor Industries by 349.8% during the second quarter. Hancock Holding Co. now owns 139,189 shares of the construction company’s stock worth $14,549,000 after buying an additional 108,247 shares during the last quarter.
  • Public Employees Retirement System of Ohio increased its position in Thor Industries by 34.5% during the second quarter. Public Employees Retirement System of Ohio now owns 37,259 shares of the construction company’s stock worth $3,894,000 after buying an additional 9,553 shares during the last quarter.

Harvey’s Options Volatility Indicator

Summary

Thor Industries is one stock that currently presents investors with the opportunity for major growth, accompanied by solid fundamentals.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the THO DEC 15 2017 140.000 CALL at approximately $3.70. Place a pre-determined sell at $7.40.

Also include a protective stop loss of $1.50.

 





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