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Options Research
Options Insight: Buy Semi Equipment vol for Intel, Samsung capex
Intel (17-Jan) and Samsung (24-Jan) are due to announce their 2013 capex
guidance, which together represent over half of global semi capex. We
believe the options market is missing the earnings-like moves that semi
equipment stocks realize on bellwether capex announcements. We
recommend investors position with February options, which capture Intel
and Samsung capex guidance, and likely each of these earnings reports.
Our favorite implementation is buying AMAT Feb $12 straddles for 7%.
Katherine Fogertey
(212) 902-6473 katherine.fogertey@gs.com
Goldman, Sachs & Co.
John Marshall
(212) 902-6848 john.marshall@gs.com
Goldman, Sachs & Co.
Amarnath Jha
(212) 934-9821 amarnath.jha@gs.com
Goldman Sachs India SPL
shares have realized a median move +/-4% on INTC and +/-3% on Samsung
capex guidance, as well as a +/- 3% on its own earnings.
Trade 2: Hedge risk to INTC earnings. Our analyst views the debate this
quarter centered around the extent of downside to margins. While he sees
risks to expectations, low skew suggests that option investors not positioning
for this risk. We recommend investors hedge with puts ahead of results.
Trade Description
Initiation date
Stock
Current price
Trade
Stock
Trade
16-Jan-13
11.77
0.76
11.77
0.76
BMY
16-Jan-13
34.30
1.24
34.30
1.24
INTC
16-Jan-13
21.88
0.37
21.88
0.37
ROC
16-Jan-13
51.21
1.70
51.21
1.70
SBUX
16-Jan-13
54.48
1.44
54.48
1.44
24-Dec-12
13.13
0.80
13.25
0.25
4-Jan-13
41.39
0.73
42.57
1.07
1.05
CROX
9-Jan-13
15.23
0.60
15.71
DFS
19-Dec-12
40.53
1.25
39.34
0.05
DPZ
9-Jan-13
45.63
0.50
45.08
0.35
EBAY
9-Jan-13
52.68
0.68
52.51
0.54
GPS
19-Dec-12
32.02
1.99
32.46
1.97
URBN
9-Jan-13
41.18
2.15
42.10
VALE5
14-Dec-12
R$ 38.38
R$ 0.82
R$ 39.65
21-Nov-12
71.88
9.50
69.47
3.39
12-Dec-12
42.40
2.63
39.18
4.50
1.85
R$ 0.83
Legend:
Exhibit 2: One page of WOW summary of upcoming catalysts for select trade recommendations
Event Move
Options
8Q
Implied Median
2.6
2.0
Ticker
AMAT
Recommended
Options Trade
Buy Feb-13 $12
Straddle
Upcoming
Catalyst
INTC Capex
Samsung Capex
Earnings Release
Catalyst
Date
'17-Jan
24-Jan
Feb
INTC
Earnings Release
17-Jan
4.6
ROC
Analyst Day
Earnings Release
17-Jan
end-Feb
BMY
Earnings Release
SBUX
Earnings Release
1M
iVol
27
2.7
25
23
Our analyst believes 4Q12 results will be in line at best, and 1Q13 guidance will
be below the Street, driven by weak PCs and margin pressure from lower
utilization. We believe setup in the options market is more positive despite risks,
and recommend investors position with puts to hedge.
4.6
5.0
25
28
Our analyst believes that ROC shares are undervalued as investors are
focusing too much on slowing TiO2 Pigments segments and missing the
potential contribution from higher growth businesses. We recommend investors
position for upside on the back of earnings and a historically stock-moving
analyst day.
24-Jan
0.9
1.1
15
16
Our analyst expects Eliquis to reach $3.6bn in sales in 2017, or 16% of total
revenue, and sees the potential for Anti-pd1 to represent 4% of total 2017 sales.
With implied volatilty near record levels, despite the potential for 2013 guidance
to drive incremental volatility in shares, we recommend investors position with
straddles.
24-Jan
3.9
3.2
27
25
Options Insight: Buy Semi Equipment vol for Intel, Samsung capex
Semi Capex Guidance:
17-Jan: Intel
24-Jan: Samsung
In the coming weeks, Intel (17-Jan) and Samsung (24-Jan) are announcing their 2013
capex guidance, which together represent over half of global semi capex. We believe
the options market is missing the earnings-like moves that semi equipment stocks
realize on bellwether capex announcements. February options capture Intel and
Samsung capex guidance, and likely each of these earnings reports. Our favorite
implementation is buying AMAT Feb $12 straddles for 7%; it has historically moved
4% on Intel capex, +/-3% on Samsung capex, and +/-3% on its own earnings.
Exhibit 3: We expect semi equipment stocks to move in reaction to Intel and Samsungs annual capex guidance
While measuring the sum of the moves relative to the straddle price is not comparable, we do it to highlight the relative
attractiveness across the universe.
Ticker
Stock Move
Stock Move
Stock Move
Straddle % of
INTC Capex + Samsung Capex + own Earnings = "Move" Spot less 'Move'
LRCX
AMAT
TER
KLAC
38.00
12.00
17.00
49.00
3.05
0.78
1.50
3.30
8%
7%
9%
7%
3%
4%
2%
3%
+
+
+
+
6%
3%
4%
3%
INTC
22.00
1.36
6%
5%
2%
+
+
+
+
4%
3%
7%
3%
=
=
=
=
13%
10%
12%
8%
(5%)
(4%)
(4%)
(2%)
6%
(0%)
Intel Capex Guidance, 17-Jan: Controversy around 2013 capex, and the path to $7 $8bn, could result in increased volatility in capex stocks. Intel will likely provide initial
2013 capex guidance in this report. We believe the firm consensus is that Intel will guide
2013 capex to $9 to $10 bn, which at the mid-point is down 16% yoy. As our analyst James
Covello wrote in his 9/26/12 note Capital reuse should allow Intel to cut capex but still get
to 14nm, he believes that Intels 2013 capex will eventually be $7 to $8 bn. The reason for
this is that when Intel is upgrading existing tools in its current factories rather than adding
brand new equipment, it is able to re-use up to 80-90% of its tools at the next node and
save significant capex.
Samsung Capex Guidance, 24-Jan (after market): Our analyst expects Samsung semi
capex to drop 30% this year. Samsung (about 25% of capex) significantly increased capex
in 2010 through 2012 driven by logic and NAND capacity additions. Our Samsung analyst
Michael Bang expects Samsung to reduce semi capex by at least 30% yoy in 2013 driven by
reductions in both logic (about two thirds less new capacity additions given the likely share
loss of Apples foundry business to TSMC) and in memory (as process migrations rather
than new capacity is mostly sufficient to meet demand).
Our preferred implementation is buying AMAT February $12 straddles; see the
following page for more details.
United States
Trade 1: AMAT Feb options capture over 50% of global capex guide
Buy AMAT February $12 Straddles, pay $0.76 (7%, stock $11.77); capture INTC and
Samsung capex and likely earnings prior to Feb expiration. Our analyst James Covello
notes that AMAT management has already guided capex to be down 5% - 15% for 2013,
the most conservative relative to the remaining semi equipment stocks. While AMAT
investors are likely bracing for a worse than expected capex outlook, if INTC does guide as
our analyst expects, it is possible that shares rally. AMAT has a high degree of fundamental
exposure to INTC capex (around10% of sales) and Samsung (20% of sales). Over the past
ten years, AMAT shares have moved +/-4% on INTC capex guidance and +/- 3% on
Samsung capex guidance, making AMAT shares some of the most sensitive to capex
announcements. However, AMAT one month implied volatility is the lowest of the group,
at 27%. This magnitude of capex moves are in-line to more than AMATs own earnings
report, yet February option buyers likely capture three events. Despite this, the straddle is
7% of spot, yet captures three earnings-like moves and a month of additional trading
days.
Peak earnings for AMAT are likely much higher than the Street expects. Our analyst
sees the potential for Applied Materials peak EPS next cycle to be $2.00 or more,
compared to $1.30 at the prior peak in 2011. He expects operational changes, that new
president Gary Dickerson is helping to implement, to drive EPS growth: (1) increased
resources in the higher margin core SPE business, (2) significantly reducing costs in solar,
(3) strong capital allocation (Varian acquisition, reduced share count). Potential update on
these initiatives on earnings could drive additional volatility in shares.
We view AMAT options as the most inexpensive to buy for INTC and Samsung capex
announcements. AMAT one month implied volatility of 27% is the lowest of the group
(exhibit 4) but AMAT moves are among the highest on INTC and Samsung capex guidance.
Further, while AMAT earnings date is not yet announced, our analyst sees a higher
likelihood that earnings occur before February expiration. Further, we note that
management is speaking at the Goldman Sachs Technology & Internet conference in San
Francisco on February 14. Commentary here could drive additional volatility in shares.
Straddle buyers risk losing the premium paid if shares close at the strike price at expiration.
Exhibit 4: AMAT one month option prices are the most
inexpensive in the semi-equipment universe, despite
having the highest exposure to Intel and Samsung
50
45
40
TER, 36
35
30
LRCX, 32
Average, 31
KLAC, 28
25
AMAT, 27
Jan-13
Dec-12
Oct-12
Nov-12
Sep-12
Jul-12
Aug-12
Jun-12
Apr-12
May-12
Feb-12
Mar-12
Jan-12
20
27
Captures 3 events:
INTC capex (more stock moving than earnings)
AMAT earnings (expect by Feb expiration)
Samsung capex
25
25
25
25
24
24
Feb 2013
Apr 2013
July 2013
Jan 2014
Options Expiration
United States
Trade 2: Hedge risk that INTC margins are worse than expected
Buy INTC February $21 puts, pay $0.37 (1.7%, stock $21.88); hedge against a worse
than expected margin outlook on earnings 17-Jan. Goldman Sachs Semiconductor
analyst James Covello believes 4Q12 results will be in line at best, and 1Q13 guidance will
be below the Street, driven by weak PCs and margin pressure from lower utilization. His
discussions with investors suggest that a revenue guide-down is consensus, and the
debate is about the magnitude and duration of the gross margin weakness. He expects
gross margins to decline into the low-to-mid 50% range in both 1Q and 2Q13, below the
Street at about 57%. Intels 3Q12 capex was its second highest all-time, which he expects to
exacerbate excess supply until at least 2Q13 (Street is modeling a 2H13 EPS snap-back that
he believes is unrealistic). He expects Intel to guide 2013 capex to $9-$10 bn (in line with
Street) and then lower it to $7-$8 bn during the year (see our 9/26/12 note on Intels capital
reuse).
Setup in the options market is more positive despite risks; buy puts to hedge. INTC
options are implying a +/-5% move on earnings, relative to the median 8 quarter move of
+/-3%. While our analyst sees greater risks of margins being guided lower, we note that
one month normalized skew is only in its 21%-ile over the past year, suggesting that the
options market is not positioning for a large move lower. Put buyers risk losing the
premium paid if shares close above the strike price at expiration.
Option prices are unusually low for SBUX earnings; buy calls. While one month options
capture earnings, implied volatility is 2 points below three month realized. Call buyers risk
losing the premium paid if shares close below the strike price at expiration.
Trade 4: ROC May calls at record lows; earnings and analyst day
Buy ROC May $55 calls, pay $1.70 (3%, stock $51.21) for January 17 Analyst Day and
earnings end Feb; option prices are near record lows. Goldman Sachs Specialty
Chemicals analyst Robert Koort believes that ROC shares are undervalued as investors are
focusing too much on slowing Titanium Dioxide Pigments segments (TiO2, mostly used as
a pigment in paint), and missing the potential contribution from higher growth businesses,
including chemicals that are predominantly used in batteries for smartphones and tablets
(23% of earnings). In fact, he sees potential for management to discuss their intentions for
the TiO2 business at the analyst day. Removal of this overhanging business, which only
represents 10% of total earnings in 2013 (17% in 2011), could bring investors to focus on
Goldman Sachs Global Economics, Commodities and Strategy Research
United States
high growth opportunities from other businesses. Our analyst sees 13% upside to his 12mth price target of $58.
Analyst Days are a significant stock-moving catalyst. ROC has held four investor days in
since 2006, with an average stock move of +/-3%, which is double the average daily move.
Recent share repurchase announcement could signal managements confidence in
near term business opportunities. On January 10, ROC announced Board authorization
for share repurchases up to $400m (about 10% of its market cap). ROC intends to pursue
the repurchase in 2013, with management citing outstanding value in ROC shares. Our
analyst sees this as a supportive data point that near term trends are tracking strong.
Option prices are approaching all time lows; buy calls for Analyst Day and earnings.
Three month implied volatility of 28% is near its lowest level since October 2007, due
largely to the low realized environment. However, we believe shares are set to realize
higher volatility on the Analyst Day considering uncertainty around managements
intentions for the TiO2 business, as well as potential updates on the other businesses.
Earnings have been a positive catalyst in 7 of the past 8 quarters as well. Call buyers risk
losing the premium paid at expiration.
Exhibit 6: Three month option prices are near record lows
ahead of 17-Jan Analyst Day, and earnings end Feb
140
120
100
80
60
40
32
31
31
30
30
29
28
28
27
26
25
25
24
Jan 2013
20
Oct-07
30
Feb 2013
May 2013
Aug 2013
Jan 2014
Listed Expiration
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Trade 5: BMY option prices near record lows ahead of 2013 guide
Buy BMY February $34 straddles, pay $1.24 (3.6%, stock $34.30); 2013 guidance likely
drives volatility in shares on earnings 24-January. Goldman Sachs Pharma analyst Jami
Rubin believes that BMY (CL-Buy) has the best pipeline and long-term growth prospects of
her covered pharma names (5-year EPS CAGR of 11% vs. peers at 3%). While BMY faced a
tough 2012 with delays in the US approval of Eliquis and the Inhibitex drug failure, Eliquis
is now approved in the US/EU/Japan with a superior label and BMYs anti-PD1, which is in
Phase 3, has transformative potential. Our analyst expects Eliquis to reach $3.6bn in sales
in 2017, or 16% of total revenue, and sees the potential for Anti-pd1 to represent 4% of total
2017 sales. She sees 14% upside to shares over the next 12-months. Over the past two
weeks, shares are up 5%, vs S&P500 up 3%. Our analysts 2013 EPS estimate of $1.80 is
below the Streets $1.84.
United States
Ahead of 2013 guidance, we recommend shareholders buy straddles. BMY one month
implied volatility of 15% is near its lowest levels on record, despite the potential for 2013
guidance to drive incremental volatility in shares. Options are only pricing in a +/-0.9%
move on earnings, which is the lower than the median 8 quarter move of +/-1.1%. Straddles
will help investors lock in recent gains in shares, and if guidance is better than expected,
the call leg of the trade will enhance returns to the upside. We show this payout graph in
exhibit 10 below.
Exhibit 8: BMY one month implied volatility is near
record lows
80
70
60
50
40
30
20
10
June Captures
* Eliquis Launch
* Anti-pd1 & Yervoy
20
18
20
17
16
15
15
Feb 2013
March 2013
14
12
10
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
June 2013
Jan 2014
Options Expiration
Exhibit 10: Straddles allow investors double the upside exposure, and lock in recent gains
Estimated payout diagram for long February $34 straddles at February expiration
$6.00
Long Stock
$5.00
Long Straddle
$4.00
$3.00
$2.00
$1.00
$0.00
($1.00)
($2.00)
($3.00)
($4.00)
$31
$32
$33
$34
$35
$36
$37
United States
Disclosure Appendix
Reg AC
We, Katherine Fogertey, John Marshall and Amarnath Jha, hereby certify that all of the views expressed in this report accurately reflect our personal
views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly
or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures
Option Specific Disclosures
Price target methodology: Please refer to the analysts previously published research for methodology and risks associated with equity price
targets.
Pricing Disclosure: Option prices and volatility levels in this note are indicative only, and are based on our estimates of recent mid-market
levels(unless otherwise noted). All prices and levels exclude transaction costs unless otherwise stated.
General Options Risks The risks below and any other options risks mentioned in this research report pertain both to specific derivative trade
recommendations mentioned and to discussion of general opportunities and advantages of derivative strategies. Unless otherwise noted, options
strategies mentioned in this report may be a combination of the strategies below and therefore carry with them the risks of those strategies.
Buying Options - Investors who buy call (put) options risk loss of the entire premium paid if the underlying security finishes below (above) the
strike price at expiration. Investors who buy call or put spreads also risk a maximum loss of the premium paid. The maximum gain on a long call or
put spread is the difference between the strike prices, less the premium paid.
Selling Options - Investors who sell calls on securities they do not own risk unlimited loss of the security price less the strike price. Investors who
sell covered calls (sell calls while owning the underlying security) risk having to deliver the underlying security or pay the difference between the
security price and the strike price, depending on whether the option is settled by physical delivery or cash-settled. Investors who sell puts risk loss of
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strikes less the premium received, while their maximum gain is the premium received.
For options settled by physical delivery, the above risks assume the options buyer or seller, buys or sells the resulting securities at the
settlement price on expiry.
Buy
Hold
Sell
Buy
Hold
Sell
Global
31%
55%
14%
48%
41%
36%
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11