from the desk of Dr. Terry F Allen

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How to Play the Accenture Earnings Announcement Thursday

Only two companies with weekly options announce earnings this week, Nike (NKE) and Accenture (ACN), both announcing Thursday after the close.  We could not get a good read on NKE (expectations did not seem unusually high or low so we couldn’t get a good handle on the possible direction the stock might take).  Even worse, NKE has a history of very large percentage changes after announcing, so if we were wrong on our directional guess, we could be in big trouble.ACN is a little more hopeful, and we will place a PEA Play (Pre-Earnings Announcement) on it either Wednesday or Thursday.

Terry

How to Play the Accenture Earnings Announcement Thursday

Accenture was founded in 1995 and is based in Dublin, Ireland.  It provides management consulting, technology, and business process outsourcing services worldwide.   Here are the numbers for ICN for the last four announcements:

ACN Whisper Numbers

ACN Whisper Numbers

The company met or beat estimates every quarter but once, and that time the stock fell 3.1% after the announcement. The stock moved higher from about $75 after the last quarterly announcement to a new high of $84.23 four weeks ago but has fallen back to about $79.80 since that time, suggesting that expectations have receded a bit.  RSI is at 44, in a neutral state.Insiders sold 16.8% of their holdings (388,854) over the last six months, a little on the high side, while institutions added 566,683 over the last quarter, a bullish signal (although on a base of 650 million shares outstanding, these numbers are not terribly significant).

The company sports a forward p/e of 17.11 which does not seem too high considering that it has maintained a steady growth of revenues and earnings for many years.  The stock has doubled in value over the past 2 ½ years.  It pays a 2% dividend which should help ward off a very large drop in the stock price.

Bottom line, in spite of whisper numbers exceeding estimates by a fair margin, expectations do not seem terribly high, especially with the recent drop in the stock price.  The company has been quite consistent in beating estimates, so it seems unlikely that there should be a big drop in the stock price after the announcement.  On the other hand, with the whisper numbers higher than estimates, there seems to be only a small chance of a big run-up in the stock.

This is the risk profile graph for two diagonal spreads (10 contracts eac), buying July 82.5 calls and selling Jun4-13 80 calls for a credit ($.40 as I write this) and buying July 75 puts and selling Jun4-13 77.5  puts for a small debit ($.05 as I write this), incurring a $2500 maintenance requirement,  assuming that IV of the August options falls by 3 after the announcement:

ACN Risk Profile Graph

ACN Risk Profile Graph

It will be interesting to see how this sugars out at the close on Friday when we will most likely close out all the positions.

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