Revisiting AMAT calls as the outlook continues to gain steam
Key Points from this Post:
- We are issuing a Buy on the Applied Materials (AMAT) January 2018 60 calls (AMAT180119C00060000) that closed last night at 1.54. This is a new position that we would be buyers of up to 2.00. Given that we are heading into the 3Q 2017 earnings storm, we’re setting a protective stop loss at 0.85.
- We continue to have a Buy on the Corning (GLW) November 17, 2017 $31 calls (GLW171117C00031000) That close last night at 0.32. Our stop loss remains set at 0.25 for this position.
- Ahead of the October 26 earnings report, we’ll continue to assess opportunities to scale into the United Parcel Service (UPS) Jan 2018 130.000 call (UPS180119C00130000) to improve our cost basis.
Tuesday night, semiconductor capital equipment company Lam Research (LRCX) and competitor to Disruptive Technology position Applied Materials (AMAT) on the Tematica Select List reported quarterly earnings that topped expectations and guided the current quarter above expectations. We found the company’s color commentary on the industry as very supportive of the bullish semi-cap demand thesis behind our position in AMAT. In our view, the stand out item from Lam was it’s initial 2018 forecast calling for not only another year of double-digit revenue growth, but for the first half of 2018 to strengthen vs. the back half of 2017. This also echoes the upbeat outlook shared by Applied just a few weeks back at its 2017 Analyst Day.
On the strength of the strengthening outlook for the semi-cap business alongside a multi-year ramp at Applied’s Display business, we are boosting our long-term price target to $65 from $60, which offers roughly 18% upside from current levels. We’re also adding the Applied Materials (AMAT) January 2018 60 calls (AMAT180119C00060000) that closed last night at 1.54. This is a new position and given that we are heading into the 3Q 2017 earnings storm, we’ll set a protective stop loss at 0.85. Following Lam’s earnings, we’ll look for capital spending results and guidance from Taiwan Semiconductor (TSM), Intel (INTC) and Samsung, which is likely to be upbeat and confirming following comments from Lam and Applied over the last month.
- We are issuing a Buy on the Applied Materials (AMAT) January 2018 60 calls (AMAT180119C00060000) that closed last night at 1.54.
- This is a new position that we would be buyers of up to 2.00.
- Given that we are heading into the 3Q 2017 earnings storm, we’ll set a protective stop loss at 0.85.
Holding steady with Corning Calls
We continue to see Corning (GLW) benefiting from rising glass demand from a number of markets (smartphones, TVs, fiber to the home) over the coming quarters as it derives 80% of its revenue and profits from the display, optical communication and specialty materials markets. One of the catalysts behind our adding the Corning (GLW) November 17, 2017 $31 calls (GLW171117C00031000) was the launch of Apple iPhone 8, 8plus and X models that featured all glass housing. Recently the underlying GLW shares have traded off following reports of tepid iPhone 8 orders as shoppers wait for the iPhone X that will have an organic light-emitting diode display and begin shipping in early November.
Before that model begins hitting shelves, Corning will report its 3Q 2017 results on October 24 and based on Applied bullish display comments as well as increasing screen sizes for smartphones and TVs, which require larger glass sizes, we expect an upbeat report and favorable guidance relative to expectations. Ahead of this report next Tuesday, we will evaluate scaling into this call position and improving our cost basis.
- We continue to have a Buy on the Corning (GLW) November 17, 2017 $31 calls (GLW171117C00031000) That close last night at 0.32. Our stop loss remains set at 0.25 for this position.
Data confirms our view on UPS
Last Friday’s September retail sales report once again showed e-commerce taking consumer wallet share and we see this only picking up further as we head into the holiday shopping season. As a reminder, the consensus among the initial and growing number of 2017 holiday shopping forecasts is digital shopping, that is online and mobile, will grow multiples faster than overall retail sales. As we have long said, United Parcel Service (UPS) is the sleeper company when it comes to the digital shopping aspect of our Connected Society investing theme. Next Thursday (October 26) UPS will report its 3Q 2017 earnings and offer what is poised to be a bullish outlook for its business this holiday shopping season.
As a reminder, in June UPS announced it would institute per-package surcharges for the holiday season to help cover the cost of hiring additional workers and renting extra planes and trucks. The surcharges start the week of November 19, which includes Thanksgiving and Black Friday, for ground shipments followed by surcharges for overnight or 2- or 3-day service beginning December 17. The additional charges will range from 27 cents a package for ground shipments early in the season to 97 cents for 2-day air and 3-day select service the week before Christmas. While that may not sound like much, let’s remember that during Christmas, UPS’s package volume nearly doubles compared to the other 10 months of the year. Odds are the company will remind investors of this intention in the upcoming earnings report.
- Ahead of that report, we’ll continue to assess opportunities to scale into the United Parcel Service (UPS) Jan 2018 130.000 call (UPS180119C00130000) to improve our cost basis.
