I'm singing this note 'cause it fits in well
With the chords I'm playing
I can't pretend there's any meaning here
Or in the things I am saying
But I'm in tune
Right in tune
US Airways Group, Inc. (LCC) stock received a 16% boost last Thursday on news of union support for a merger with bankrupt American Airlines. Fortunately, we have had long exposure to LCC since being recommended on January 28, 2011. On June 9, 2011, we elected to wait for another day to re-enter the buy/write position. Well, "I can't pretend there's any meaning here, But I'm in tune," because this is just what we were looking for and "I'm singing this note 'cause it fits in well."
US Airways Chairman and Chief Executive, Doug Parker, said "We are pleased to report significantly improved first-quarter financial results in spite of record-high fuel prices," in the carrier's financial results statement. "Consumer demand for our product remains very high, resulting in record-high first-quarter revenue, load factor, yield, and PRASM."
The action we want to take to get "right in tune" is to enter the buy/write exposure to the long position we already hold (entered January 28, 2011). If you don't already hold a long position in LCC, then you should add one-half the number of shares you would like to have exposure to as a long purchase. I recommend sell to open the LCC $10 Sept Call (LCC120922C00010000) for approximately $1.46 and sell to open the LCC $10 Sept Put (LCC120922P00010000) for approximately $1.47. This will provide us exposure to the other one-half position in LCC and yield $2.95 in premium until September 2012, putting us "Right in tune."
I wanted to provide a quick update on Rockwell Collins (NYSE:COL), to which we recommended short exposure on January 28, 2012. COL recently announced Q2 earnings and again benefited from a $14 million warranty-reserve reversal to meet estimates of $1.09. Without this reversal COL would have reported $1.03. The company reported lower revenue and guided lower for FY2012. I continue to feel that the forward earnings quality is unsustainable, and reiterate short exposure on COL.
I also recommend adding short exposure to Hanesbrands, Inc. (NYSE:HBI) to put us "in tune." HBI's recent earnings announcement beat their lowered estimates. I have many concerns with management's cash flow forecasts. Management would like to see free cash flow of $400-500 million, allowing them to pay off $300 million of debt in 2012. Additionally, they would like to have pension contributions of $30-35 million and $45 million in CapEx. HBI has done a poor job of forecasting free cash flow the last 2 years, and I don't expect this year to be any different given the quality of earnings issues.
These positions should help keep our Dark Horse Traders' Hedge "right in tune" with the market.
Sell to Open LCC $10 Sept Call at the market.
Sell to Open LCC $10 Sept Put at the market.
(If you don't already have one-half long exposure to LCC, buy to open LCC at the market).
Sell to Open HBI at the market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.