Earnings Preview: McDonald's Corporation, 3M Co, and Caterpillar Inc.

Dow stocks McDonald's Corporation (NYSE:MCD), 3M Co (NYSE:MMM), and Caterpillar Inc. (NYSE:CAT) are set to report earnings tomorrow

by Josh Selway

Published on Jul 25, 2016 at 11:10 AM

One of the biggest earnings weeks of the quarter is upon us. Among those set to report on Tuesday morning are Dow stocks McDonald's Corporation (NYSE:MCD)3M Co (NYSE:MMM), and Caterpillar Inc. (NYSE:CAT). Below, we'll take a look at the pre-earnings options activity on MCD, MMM, and CAT.

  • Though it's 0.9% lower today at $127.16, MCD still boasts a year-over-year lead of 32%. The stock remains within striking distance of its all-time high of $131.96 from May, but short-term options traders have been decisively put-skewed. This is according to McDonald's Corporation's Schaeffer's put/call open interest ratio (SOIR) of 1.74, which ranks in the 90th annual percentile. Looking back, MCD has moved lower in the session after reporting earnings in five of the past eight quarters, with an average swing of 2%. This time around, the options market is pricing in a move of 3.6%, in either direction. If a slightly larger move occurs to the upside, MCD will again be eyeing record highs, and an unwinding of pessimism in the options pits could add even more fuel to its fire. 

  • MMM has also been strong on a long-term basis, adding almost 21% in the past 12 months to trade at $179.30, and touching an all-time high of $182.27 just last week. The stock's post-earnings performance has been mixed, sporting gains in the session subsequent to earnings in four of the past eight quarters. Wall Street's expectations seem low this time around. Not only has put buying more than doubled call buying during the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), but 69% of covering brokerage firms rate 3M Co a "hold" or "strong sell" -- even after its record-setting performance. A shift in sentiment -- in and out of the options pits -- could have MMM hitting all-time highs once again. 

  • CAT, on the other hand, has been unable to match the success of its blue-chip peers. At $78.76, the shares hold just a slim year-over-year lead, and may have trouble surmounting the round $80 level, which sent them lower back in April. As such, put open interest among short-term options nearly doubles call open interest, according to the stock's SOIR of 1.92. On the eve of tomorrow's big event, the options market is pricing in a 5.4% post-earnings single-day swing for Caterpillar Inc. CAT's post-earnings performance from this time last year may be a cause for concern. Specifically, in the session immediately following its earnings release last July, CAT shares dropped 3.6%. 
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