Pre-Earnings Analysis

1. ADT- ADT Corp will report Q1 earnings before the bell tomorrow morning. Analysts are looking for $0.49 per share in EPS on revenue of $884M. Shares have moved higher after earnings on 4 out of the last 7 reports. The company has struggled to grow earnings in recent years and there is no signs of momentum coming in the near-term either. They earned $2.02 in FY14 and are only projected to earn $2.12 in FY16 (sales growth in the low to mid single digits). On January 8th, ADT named a new President of Canadian operations and announced a 5% dividend increase to $0.21 per share (2.49% yield), but an emergence of competition from new smart home security technology is still creating a challenge. Raymond James initiated the stock with an outperform rating this morning. The other analyst change this month occurred on January 12th when Morgan Stanley downgraded the stock to underweight from equalweight. Heading into the quarterly report someone bought 1,750 Jan 2016 $35 puts for $5.40 each, against open interest of 2,007 contracts. Also, just yesterday a total of 2,500 Feb $31 puts were purchased for $0.45 each (open interest rose to 3,754 from 1,254 contracts). February options are pricing in a $2.75 move, or 8.13%, in either direction through expiration.

1. EA- Electronic Arts will report Q3 earnings after the bell tonight. Analysts are looking for $0.92 per share in EPS on revenue of $1.3B. Shares have moved higher after earnings on 6 out of the last 7 reports. EA has been a beneficiary of the cycle of gaming consoles, which has led to a boost in sales of their Madden NFL and FIFA franchises. The stock trades at a P/E ratio of 20.40x (Mar FY16 estimates) with 13.4% EPS growth, price to sales ratio of 3.72x, and a price to book ratio of 5.78x. This compares to Activision Blizzard’s (ATVI) P/E ratio of 14.22x (Dec FY15 estimates) with 4.4% EPS growth, P/S ratio of 3.44x, and a P/B ratio of 2.14x. EA does trade at a premium to ATVI, but it is warranted when factoring in the top and bottom line growth coming from EA (ATVI is likely to see revenues shrink in FY15). Yesterday, Brean Capital kept their $54 price target, MKM Partners upped their target to $48 from $41, Credit Suisse increased their PT from $45 to $55, and Needham downgraded the stock to buy from strong buy, but actually raised their price target to $51 from $49. Last week on Friday prior to the close, a trader put on the Jan 30 weekly $50/$53 1×2 ratio bull call spread 5,000 times for a $0.65 debit. He/she is betting on the $3.25 implied move for this week being resolved to the upside and the stock closing in the $50.65-$53.00 range on Friday ($53 being ideal). Even today there was some more smaller action in the weekly options. Someone bought the Jan 30 weekly $45/$48 bear put spread 750 times for a $1.00 debit and put on that same ratio call spread 500 times for a $0.45 debit.

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