“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, March 06, 2017

by Ian Harvey

IMPORTANT NOTE: There is no stop-loss or pre-determined sell price recommended – this is left to the discretion of the individual trader.


Option Trade – Kate Spade & Co (NYSE:KATE) Calls

Thursday, March 09, 2017

** OPTION TRADE: Buy the KATE APRIL 21 2017 25.000 call at approximately $1.05. Sell price is left to your own judgment.

There is plenty of speculation of buyout rumors surrounding Kate Spade & Co (NYSE:KATE), a luxury handbag and fashion accessories company. Already, KATE has surged higher multiple times on buyout rumors, and Reuters recently reported that Michael Kors and Coach have advanced to the second round of bidding.

Kate Spade & Company is also presenting some positive technical perspective, as the company is seeing favorable trends on the moving average crossover front. Recently, the 50 Day Moving Average for KATE broke out above the 200 Day Simple Moving Average, suggesting a short-term bullish trend.

This has already started to take place, as the stock has moved higher by 28.6% in the past four weeks.

More bullishness may especially be the case with KATE on the earnings estimate revision front lately. No estimate has gone lower in the past two months, compared to 5 higher, while the consensus estimate has also moved higher too.

Influencing Factors to Consider               

Kate Spade & Co last released its earnings results on Thursday, February 16th. The company reported $0.41 EPS for the quarter, beating the Thomson Reuters’ consensus estimate of $0.35 by $0.06. The company earned $470 million during the quarter, compared to analysts’ expectations of $472.80 million. Kate Spade & Co had a return on equity of 27.34% and a net margin of 9.67%. The business’s revenue was up 9.8% on a year-over-year basis. During the same period in the prior year, the business posted $0.32 EPS. On average, equities analysts predict that Kate Spade & Co will post $0.87 earnings per share for the current fiscal year.

After the earnings report, Kate Spade's officially confirmed that it is reviewing strategic alternatives. More specifically, with the help of financial advisor Perella Weinberg Partners, Kate Spade is "conducting a process to explore and evaluate strategic alternatives to further enhance shareholder value."

“The brand has done a good job of positioning itself as a unified brand across channels,” said Chris Paradysz, chief executive of PMX Agency, a global marketing firm. “It’s a seamless experience for the consumer, which makes it easy to shop there and understand the brand.”

With online channels—including e-commerce and mobile—growing in sales significance for retailers, an acquisition with a first-rate digital platform would be a solid purchase, analysts said. Moreover, companies looking for additional expertise could be enticed to buy what Kate Spade offers rather than attempt to build it.

“[I]t’s alluring to brands that could use Kate Spade’s digital capabilities,” said Paradysz. “They’re always early adopters and what’s so unusual is they’re so early and thorough. They’re well thought-out.”

Just this month, Kate Spade hosted a Facebook Live event in which it showcased its spring 2017 and fall 2017 collections, including links that allowed shoppers to learn more about the items and purchase them, according to WWD.

Wells Fargo, like Paradysz, views Coach as a leading suitor. Analysts highlighted the balance sheet flexibility that Coach has now that it sold its headquarters at the new Hudson Yards development in New York.

Any buyer would likely focus on Kate Spade’s relative health in a handbag sector that has struggled, the company’s expansion opportunities in the wholesale channel and the margin potential, Wells Fargo said in a research note.

“Kate Spade proved again today the brand has plenty of runway on the top line, has the potential to take margins much higher towards accessory peer averages and could likely generate ample synergies for a potential multi-national buyer,” Wells Fargo wrote. “If management can execute on the margin plans, Kate Spade would be one of the most compelling margin expansion stories, in our view, in retail today with potential to hit 20%-plus over the next several years.”

Wells Fargo rates Kate Spade shares outperform and raised the valuation range to $24 to $25 from $23 to $24.

Analysts and Hedge Funds Opinions

Kate Spade had its price target upped by stock analysts at Cowen and Company from $23.00 to $27.00 in a report released on Wednesday. The firm presently has a “market perform” rating on the stock. Cowen and Company’s target price would indicate a potential upside of 15.53% from the stock’s previous close.

Also, Mizuho upped their price target on Kate Spade & Co from $21.00 to $25.00 and gave the company a “buy” rating in a research report on Friday, February 17th.

As well, Zacks Investment Research raised Kate Spade & Co from a “sell” rating to a “hold” rating and set a $25.00 price target on the stock in a research report on Friday, February 17th.

And, A.R.T. Advisors LLC bought a new stake in shares of Kate Spade & Co during the fourth quarter valued at $1,202,000. Peregrine Capital Management LLC bought a new stake in shares of Kate Spade & Co during the third quarter valued at $15,575,000. Harris Associates L P raised its stake in shares of Kate Spade & Co by 0.7% in the third quarter.

Summary

Kate Spade & Co has a market capitalization of $3.00 billion, a price-to-earnings ratio of 19.70 and a beta of 1.62. The firm’s 50 day moving average is $20.11 and its 200 day moving average is $17.94. Kate Spade & Co has a 12 month low of $14.02 and a 12 month high of $26.46.


Option Trade – International Game Technology Ordinary Shares (NYSE:IGT) Calls

Wednesday, March 08, 2017

** OPTION TRADE: Buy the IGT APRIL 21 2017 30.000 call at approximately $0.25. Sell price is left to your own judgment.

An earnings short-squeeze options trade idea on gaming activities player International Game Technology Ordinary Shares (NYSE:IGT), which is set to release numbers on Thursday before the market opens, has presented itself. Wall Street analysts, on average, expect International Game Technology to report revenue of $1.33 billion on earnings of 52 cents per share.

The current short interest as a percentage of the float is International Game Technology sits at 2.3%. That means that out of the 96.13 million shares in the tradable float, 2.27 million shares are sold short by the bears.

Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, there is often a tradable short squeeze that develops as the bears rush to cover their positions. Even the best short-sellers know it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally, and this is likely to occur.

IGT has been trending slightly higher over the last three months.

Last quarter the company topped estimates on the top and bottom lines, but in the previous quarter the company missed its profit forecast.

IGT trades with a forward P/E of 13.0, with earnings forecast to rise 5.3% this year, and 7.6% next year. Analysts see a decent amount of upside in the stock, with an average price target of $30.00, suggesting shares are undervalued by as much as 9.7%.

Influencing Factors to Consider               

In a report on gaming suppliers, Macquarie Research analyst Chad Beynon pointed out that the peer group average is 15 times free cash flow. His report described the gaming-device and lottery concern as “a deep value and a top name in the sector.”

If IGT were to attain a multiple as high as its peers’ average, its shares would trade in the high $30s.

And such a price wouldn’t appear unreasonable, considering the company’s high recurring revenue. In addition, the shares offer an annual dividend of 80 cents, a 3% yield at their recent price.

London-based IGT makes 40% of its revenue from managing lotteries in the U.S. and elsewhere around the globe. This is a stable, growing business, supported by long-term contracts with government agencies.

The lottery business is set to grow in the mid-single digits annually, driven largely by innovation. Last year, IGT renewed its major contract with the Italian Lotto. Over the next few years, major renewals with U.S. states look secure, as well. Switching vendors typically is very costly in the lottery business.

The remainder of IGT is on the gaming side. Its operations include selling slot-machine cabinets, games, and software to casinos around the world. The old company had been losing market share to nimbler rivals, but since the merger, the business has been stabilizing.

IGT has introduced new products, which have led to higher sales and increased shipments. In the next two years, product sales could grow 13%, estimates analyst Beynon.

Analysts and Hedge Funds Opinions

Analysts at Bank of America Merrill Lynch now have a USD 30 price target on IGT.

According to the most recently released broker notes, 1 analyst has a rating of “strong buy” on the stock, 2 analysts “buy”, and 3 analysts “neutral”.

Summary

International Game Technology has a 50-day moving average of $27.01 and a 200 day moving average of $26.19. International Game Technology has a 1-year low of $15.46 and a 1-year high of $32.07. The stock has a market cap of $5.60 billion, a P/E ratio of 108.24 and a beta of 1.51.


Option Trade – Urban Outfitters, Inc. (NASDAQ:URBN) Puts

Monday, March 06, 2017

** OPTION TRADE: Buy the URBN MARCH 17 2017 25.000 put at approximately $0.90. Sell price is left to your own judgment.

There's carnage in the retail industry at the moment as once-beloved chains watch their stocks crash and burn.  Urban Outfitters, Inc. (NASDAQ:URBN), a lifestyle retail company, manages five brands offering apparel and home goods directed at millennial shoppers. The company operates more than 400 of its own retail locations worldwide, as well as selling its merchandise through other specialty and department stores. That should give investors some pause because department store sales have been plummeting.

Urban Outfitters Inc. is scheduled to release fourth-quarter fiscal 2017 results on Mar 7. In the preceding quarter, this Philadelphia, PA-based company reported earnings miss of 9.1%.

The current Consensus Estimate for the quarter under review is 56 cents, reflecting a year-over-year decrease of over 8%. The Consensus Estimate has been witnessing downward revisions in the past 60 days. Analysts now expect revenues of $1,037 million, in comparison with $1,013 million reported in the prior-year quarter.

Also, Urban Outfitters has underperformed the categorized Retail-Apparel/Shoe industry and the S&P 500 in the past six months. The company’s shares have declined 29.4%, while the categorized industry has lost 12% in the last six months. Meanwhile, the S&P 500 has gained 7.9% during the same time frame.

Influencing Factors to Consider               

Urban Outfitters’ exposure to the Canadian and European markets could hurt the bottom-line performance in the quarter to be reported due to foreign currency headwinds.

Moreover, the company faces stiff competition in the retail segment from other department stores, discounters, home furnishing stores, specialty retailers and direct-to-consumer businesses on attributes such as merchandise assortment, price, quality, location and credit facility.

Further, aggressive pricing by competitors, is likely to dent the company’s top-line and bottom-line results.

There is also concern noted by management’s remark over gross margin, which is expected to decline more than previously anticipated. Despite reporting year-over-year increase in holiday sales, Urban Outfitters expects gross margin to be affected by higher demand for lower margin items and fall in store traffic. This in turn will result in lower store sales, which compelled management to increase promotional activity.

Management has blamed slow growth on fashion misses as well as too much inventory from too many stores. This is a very careful way to state there is too much competition, and the blame on fashion misses points to the inherent risk in a retailer like Urban Outfitters.

The growth of e-commerce has left the traditional retail industry with too many stores, and new brands have emerged that are solely reliant on e-commerce, with no traditional -- and expensive -- brick-and-mortar locations. What it all boils down to is that the retail industry is highly competitive, and with the rise of e-commerce it is only becoming more so. Urban Outfitter's is struggling to find a successful formula for consistent performance in this climate.

Since the end of fiscal 2010 -- ending in January -- through the first nine months of fiscal 2017, Urban Outfitters' management has reduced the share count from 171.2 million to 117.4 million through share repurchases. These share repurchases have cost a total of $1.9 billion, or more than half of the retailer's current market value.

Stores are underperforming and growth is slowing, and this is caused by a lot of competition in the industry, which means there is not an easy solution to fix Urban's problem. If the business is generating more cash than management knows what to do with, it should distribute the excess cash back to shareholders through dividends.

Instead, management has poured $1.9 billion into a stock that has gone nowhere in seven years. Investors would have been better off investing that $1.9 billion in an S&P 500 Index fund or depositing the money in a bank account to collect interest.

Analysts and Hedge Funds Opinions

At the end of February, MKM Partners downgraded the firm to a "Sell" rating from Neutral following doubts about it margin trends and establish a price target of $20 per share, in the last close Urban was trading at around $26.

Summary

As well as domestic expansion, international expansion seems to be a channel for growing. Since volatility will continue in the future, it is a major risk for the company to achieve the desired growth.

Urban Outfitters shares have underperformed for the last one, three, five, and 10 year period versus the S&P 500 Index. From a financial perspective, it's easy to see why; while Urban's revenue growth has nearly doubled since 2009, profits have barely budged.

Urban Outfitters has a market capitalization of $3.03 billion, a PE ratio of 13.54 and a beta of 0.66. The stock has a 50 day moving average price of $26.66 and a 200 day moving average price of $32.15. Urban Outfitters, Inc. has a 12-month low of $24.29 and a 12-month high of $40.80.




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