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Valassis Communications Drops After Earnings

Bulls are not abandoning the VCI camp, in spite of lowered earnings guidance

by 10/26/2011 2:15:15 PM
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Valassis Communications, Inc. (VCI - 17.32) stepped into the earnings confessional before the bell sounded this morning. VCI reported a third-quarter profit of $27.5 million, or 58 cents per share, compared to last year's profit of $27 million, or 52 cents per share. Excluding items, earnings decreased on a year-over-year basis to $69.8 million, or 79 cents per share, from $79.8 million, or 82 cents per share. Revenue was also on the decline, falling to $528.4 million from last year's revenue of $572.4 million. The results came in lower than analysts' expectations for adjusted earnings of 73 cents per share on $571.1 million in revenue.

In light of this weaker-than-expected earnings report and playing the popular "global-economic uncertainty" card, VCI has lowered its 2011 fiscal outlook on an adjusted basis to $2.56 per share on revenue of $315.1 million. Wall Street, meanwhile, is calling for a full-year profit of $2.82 per share.

Ahead of today's report, option players were decidedly bullish on the multi-media concern. The stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio stands at 7.25 -- showing a distinct preference for calls over puts. This ratio ranks higher than 81% of similar annual readings taken during the past year, indicating that calls have been bought to open over puts at accelerated levels over the last two weeks.

In addition, VCI's Schaeffer's put/call open interest ratio (SOIR) weighs in at 0.68, in the 43rd percentile of its annual range. In other words, short-term options players are more bullishly aligned than usual toward the stock.

Needless to say, option activity is heavy on VCI in today's session, with calls and puts trading at 13 times and 17 times the average daily volume, respectively. It seems bullish bettors are hoping today's massive decline is just a passing phase, as the most popular contract is the December 20 call, which has seen over 3,200 contracts cross the tape. The majority of these contracts are being acquired at the ask price, and volume is higher than open interest -- indicating new positions are being bought to open.

Technically, VCI has found 2011 to be a challenging year. During the course of the past 40 trading sessions, the equity has lagged the broader S&P 500 Index (SPX) by over 22 percentage points, on a relative-strength basis.

In today's trading, the stock has added nearly 12% to its 40% year-to-date deficit. What's more, VCI touched a new annual low of $14.71. The stock is now trading south of $18.38, which marks the halfway point between its March 2009 low and June 2010 high. VCI has only finished one week below this level since early 2010. This area could provide a layer of resistance as VCI continues to struggle.

Weekly price chart of VCI since January 2010


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