Lam Research: Post-Earnings Price Hike Expected
- LRCX has exceeded estimates for the past eight quarters, but the stock fell after the announcement in five of those quarters.
- Three analysts have initiated coverage on the company in the past week, and all project much higher price targets.
- We have identified one indicator that successfully predicted the largest-gaining price increase after earnings, and it is now in effect for only the second time in two years.
Lam Research (NASDAQ:LRCX) announces earnings after the market closes on Tuesday, April 17, 2018. Here are the relevant numbers for the last eight quarterly earnings announcements:
LRCX has an unblemished record of exceeding estimates every quarter for the last two years. However, the stock price fell after five of the eight announcements. Most of the post-announcement price changes were minimal, averaging 3.75%. Note that the only time that the stock rose substantially after the announcement (4/18/17), in the three weeks leading up to the announcement date, it had traded lower. In all of the other periods, the stock rose as the announcement date approached (the green prices in the above table are all lower than the price at the close on the day before the announcement).
When the stock price rises as the announcement period approaches, it is a strong indicator that expectations are rising. When expectations are high, the stock tends to fall regardless of how great the earnings might be. The average change in the stock price for the quarters when the stock rose in the three weeks leading up to the announcement was -0.86% while the average price change for the one quarter when the price fell going into the announcement date, the stock rose 10% by the end of announcement week. Earnings exceeded estimates in all eight quarters, but the expectation level was clearly more significant that the actual results.
This time around, it looks very much like the stock is falling as the announcement date approaches. Since the recent history shows a much higher correlation between the level of expectations and the stock price change than the actual results, this should be seen as a strongly bullish sign.
The technical indicators seems to support a bullish sentiment as well:
LRCX has declined lower over the past few weeks after sellers stepped in at resistance from a rising channel top. The stock price is currently lingering near a confluence of the 100-period and 50-period daily moving averages. While these moving averages have not historically been respected on a daily chart, the 50-period moving average was pivotal in reversing price action in the steep decline that occurred in early February. That same weekly moving average is now found near a horizontal level at $178 which was significant support in early December. The support level also resides near the bottom of rising channel that has been in play since July. The first level of upside resistance falls at $219 as the level proved to be a major hurdle in November and January.
The options are pricing in a 7.6% fluctuation after the announcement, a huge number compared to the average 3.75% fluctuation over the past two years. For investors bullish on the company, this would seem to be a great time to write an out-of-the-money short-term call on the stock, and enjoy some generous premium income as well as some price appreciation once the announcement is made.
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To summarize our thinking, we believe that LRCX will move higher after the announcement. Recent analyst thinking is bullish, and there seems to be technical support for a higher stock price as well. But our strongest argument is based on the apparent lower level of expectations that has only existed once before in the prior eight quarters, and that time, the largest post-announcement gain took place (it gained 10% by the end of the week). The company has consistently bested estimates, but the market has taken a ho-hum reaction to the actual numbers. Expectations seem to be a better measure of what the likely direction the stock will take after the announcement, and today's lower level of expectations are extremely bullish.
Unless the stock rallies strongly between now and April 16, we expect to see a nice gain in the stock price after earnings are announced, regardless of what they might be.
This article was written by
Analyst’s Disclosure: I am/we are long LRCX OPTIONS SPREADS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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