Earnings Preview: International Business Machines Corp. and Netflix, Inc.

International Business Machines Corp. (IBM) and Netflix, Inc. (NFLX) will report quarterly earnings after the close on Monday

Jul 15, 2016 at 11:09 AM
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Earnings season is now underway, and next week's schedule will really begin to heat up, with several blue-chip names set to reveal quarterly figures. It begins with tech giant International Business Machines Corp. (NYSE:IBM), which will report after the close on Monday. Also stepping into the earnings confessional Monday evening is streaming media stock Netflix, Inc. (NASDAQ:NFLX). Below we'll take the pre-earnings temperature of IBM and NFLX at the end of a huge week for U.S. markets.

IBM has added 15.5% in 2016, and hit a year-to-date high on Thursday, following several bounces off its 200-day moving average in recent months. The stock has been trekking higher in July so far, repeating a historical pattern. But today, the shares are 0.8% lower at $159.00, after Barclay raised its price target to $140 from $125 -- still a discount to current levels. Overall, analysts have maintained a cautious outlook, with 11 out of 18 rating IBM a "hold" or worse.

Traders, meanwhile, have been somewhat more optimistic of late. Short interest represents just 2.3% of IBM's float, and is near annual lows. Plus, options traders have been picking up calls in recent weeks. IBM's 10-day call/put volume ratio of 1.31 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits higher than 63% of the past year's readings, and at its highest level since early May.

The options market is currently pricing in a one-day post-earnings move of 5.4% for International Business Machines Corp. (NYSE:IBM) -- slightly wider than the 4.2% average swing over the past eight quarters. Though the stock has made a move to the downside in the session following earnings for the past seven quarters in a row, today's traders seem to be targeting a positive move. IBM calls are trading at three times their average intraday rate. The action is punctuated by a long call spread at the August 165 and 170 strikes, and buy-to-open activity also looks to be happening at the weekly 7/22 160-strike call.

NFLX has never fully recovered from its post-earnings plummet in mid-April, when the stock sunk 13% in a single session. The shares are off 14.5% year-to-date, and have been struggling with resistance at their 160-day moving average. Today, NFLX is down 0.3% at $97.73.

The stock has seen a slew of negative analyst notes in recent weeks, yet 16 out of 27 brokerage firms still maintain a "buy" or better rating, and the average 12-month price target of $116.39 sits at a healthy premium to current levels. Should Monday's earnings miss analyst estimates, a further round of bearish attention could put pressure on the shares.

Traders are largely in NFLX's bullish corner, despite the stock's recent troubles. While more than 8% of the equity's float is wrapped up in short interest, these pessimistic bets fell by about 13% during the two most recent reporting periods. And call buying has been a popular strategy in NFLX's options pits, per the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 1.47 -- in the 86th percentile of its annual range.

NFLX has historically made some hefty moves in the session immediately following its earnings report -- 12.4% on average, over the past eight quarters. Options traders' expectations appear to be right in line, pricing in a 12.4% swing for Tuesday. The stock's options are crossing at below-average rates at midday, with calls leading puts. But most are paying no mind to earnings, with the July series -- which expires at tonight's close -- accounting for all 10 of the most active options.

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