“Cut-to-the-Chase” Recommendations
- Week Beginning October 17, 2016 -

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.

Tuesday, 18th October, 2016

Option Trade – Alaska Air Group, Inc. (NYSE:ALK) Calls

**OPTION TRADE: Buy the ALK NOV 18 2016 75.000 call at approximately $1.35. Sell price is left to your own judgment.

Alaska Air Group, Inc. (NYSE:ALK), the parent company of Alaska Airlines, is scheduled to report third-quarter 2016 results on Oct 20, before the market opens. The consensus calls for earnings of $2.04, down from $2.16 during the same period last year.

Last quarter, the company recorded a positive earnings surprise of 1.92%. Moreover, Alaska Air beat estimates in each of the last four quarters with the average earnings surprise at 2.50%.

Alaska Air sold off at the start of the summer months as oil prices improved, but the stock has regained its footing, and has trended higher over the last couple of months, and could build on its recent gains if the company is able to post solid third-quarter results.

The consensus is for earnings of $2.04, but the street has a slightly higher whisper number of $2.07, suggesting a decent chance that the company will post better than expected results. Analysts appear to expect a strong quarter.

The stock has a very low P/E of just 10, and earnings are forecast to rise 8.3% this year, so there is reason to expect the stock to move higher.

The stock has fallen 10.0% on the year.

Why Alaska Air?

Alaska is operating well as an independent carrier. Traffic jumped 7.4% on a 4.2% increase in capacity last month, and is now up 10% for the year. August traffic improved 9% on a 10.3% jump in capacity. The trend on load factor also reversed as Alaska filled 84.1% of available seats, a 2.5% gain over last September's performance. More than 90% of the carrier's flights arrived on time.

More impressive is that it's posting these sorts of results despite intensifying competition. Delta Air Lines, in particular, has made Alaska Air's home base of Seattle-Tacoma Airport -- known as SEA-TAC -- a new hub, with routes stretching across the Western U.S. and into the Pacific. Buying Virgin America as it ramps up flights to Hawaii from the West Coast could help it defend against Delta and others.

Analyst Input

Five research analysts have rated the stock with a hold rating, ten have assigned a buy rating and one has issued a strong buy rating to the company’s stock. The stock presently has a consensus rating of Buy and a consensus price target of $86.30.

Alaska Air Group has a market capitalization of $8.86 billion, a P/E ratio of 9.96 and a beta of 0.89. Alaska Air Group has a 52-week low of $54.51 and a 52-week high of $87.17. The stock’s 50 day moving average price is $68.03 and its 200 day moving average price is $67.61.

Tuesday, 18th October, 2016

Option Trade – Microsoft Corporation (NASDAQ:MSFT) Calls

 **OPTION TRADE: Buy the MSFT NOV 18 2016 60.000 call at approximately $0.50. Sell price is left to your own judgment.

Microsoft Corporation (NASDAQ:MSFT), the tech titan, will report its fiscal first quarter numbers on October 20. The company will report its quarterly results after the market close, with the consensus calling for earnings of $0.68 per share. During the same period last year the company earned $0.57 per share. Last quarter, the company posted a positive earnings surprise of 18.97%. Over the past four quarters, the company has posted an average positive earnings surprise of 11.49%.

Microsoft got a big boost following its last quarterly report, and if the company is able to post another set of strong numbers there is still more upside for the stock. The stock trades with a trailing P/E of 27.3, but a much lower forward P/E of 17.8. As long as the company is able to hit its earnings estimates the stock should build on its recent gains, and with analysts forecasting earnings growth of 3.6% this year, and a much higher 11.4% next year, there is still upside for the tech leader. The consensus calls for earnings of $0.68, but the street expects a much better quarter, with the whisper calling for $0.72. If Microsoft is able to hit the whisper number, shareholders will likely enjoy a nice jump in shares.

The stock is up a modest 3.9% on the year.

Why Microsoft?

Microsoft reported better-than-expected fiscal fourth-quarter results with both the top and the bottom lines exceeding the Consensus Estimate. While increased investment in the cloud impacted margins, forex was surprisingly an offsetting factor.

The company has a hybrid and hyperscale cloud spanning multiple jurisdictions, which makes it ideal for multinational companies and banks that have operations all over the world and are required to be in compliance with laws of the countries in which they operate. This is what Microsoft says has drawn some of the world’s largest banks to Azure.

Microsoft also offers 33K cloud services, which helps it capture big customers like Boeing, Rolls-Royce and Schneider Electric. Another important customer it won in the fourth quarter was Facebook, which currently uses Office 365 for its 13K employees.

For fiscal first-quarter of 2017, Microsoft expects Productivity & Business Process revenues of $6.4-6.6 billion, Intelligent Cloud revenues of $6.1-$6.3 billion and More Personal Computing revenues of around $8.7-9.0 billion. This amounts to total revenue between $21.2 billion and $21.9 billion. Microsoft expects COGS of $7.5-$7.6 billion, opex of $7.35-$7.45 billion and other income/expense of $0.

Management said that 2017 opex will be in a range of $31.1-$31.4 billion as investments in strategic growth opportunities continue. Non GAAP tax rate is expected to be 20% (+/-2%), depending on the variability of factors such as mix of services revenue versus licensing revenues, the geographic mix of revenues and the timing of equity. A higher mix of cloud revenues is also expected to increase the tax rate.

Analyst Input

Microsoft Corp. was upgraded by Zacks Investment Research from a “hold” rating to a “buy” rating in a research note issued last Thursday. The firm currently has a $64.00 price objective on the software giant’s stock. Zacks Investment Research’s price target would suggest a potential upside of 12.06% from the stock’s current price.

According to Zacks, “Microsoft is one of the largest software companies in the world. It is also one of the leading providers of cloud infrastructure and services. The business reorganization and “cloud-first mobile-first” focus are encouraging, but execution and FX risks remain. Additionally, competition is stiff and the company’s dominant position in the PC market continues to be challenged. Meanwhile, estimates have been stable lately ahead of the company's Q1 earnings release. The company has positive record of earnings surprises in recent quarters. Moreover, enterprise strength, the Office 365 subscription model, Azure and promising new products will continue to generate sizeable cash flows with Windows 10 helping maintain consumer share this year and driving enterprise growth in 2016. Additionally, the expansion of Microsoft HoloLens in 6 new markets will improve the company's posiition in the augmented and virtual reality space.”

Microsoft Corp. has a 50 day moving average of $57.40 and a 200 day moving average of $54.45. The company has a market cap of $447.45 billion, a PE ratio of 27.34 and a beta of 1.09. Microsoft Corp. has a 1-year low of $47.02 and a 1-year high of $58.70.