Does Altria's earnings report mean it's time to quit?
Michael Fowlkes 11/04/2013
Typically when a company outpaces analyst estimates with its
quarterly earnings, we see the stock move higher the following
day, but that is not always the case. For instance, Altria (
) reported upbeat earnings before the market opened on October
24, but the stock lost 1.9% that day.
Given the fact that the stock has moved higher in the week
following its report, you might try to blame its earnings-day
sell off on a weak overall market, but that was not the case. On
the day the stock fell 1.9%, the Dow Jones gained 0.6%, so there
had to be another reason that Wall Street initially took a
bearish stance on the stock.
First, let's look at the numbers. The company reported
adjusted earnings of 65 cents per share, up from 32 cents during
the same period last year, topping analyst estimates by a penny.
Revenues climbed 3.4% versus the same period last year.
Given its strong earnings and revenue numbers, plus a strong
overall market, a lot of investors were left scratching their
heads wondering why the stock was so weak following the
announcement. The answer may be found in the company's forward
With Altria coming off such a strong quarter, you might assume
that it would raise its full year guidance, but it did not.
Instead, the company reaffirmed its previous 2013 full year
earnings per share guidance of a range between $2.36 and
Luckily for investors in the stock, Wall Street quickly
overlooked the forward guidance and focused on what actually took
place during the quarter, which was by all accounts very
positive. The stock reversed its losses, and has managed to gain
3.5% from its closing price the night before its earnings
The real question is what does this say about overall investor
sentiment. In my opinion, it shows that investors are more
worried about the overall economy than many of us want to
believe. There appears to be a real concern over whether or not
the market can continue trading near its all-time high, and as a
result Wall Street sold off the stock due to its not raising its
full year guidance.
With Altria initially selling off following its earnings
report and since trading higher, it can be a bit confusing for
investors that want to play the stock. The stock is currently
trading at its 52-week high, and I believe that it will be tough
for the stock to trade too much higher from its current level,
but there is a chance that it could add a little more to its
recent gains. Given this view, I would want to set up a bearish
trade, but with protection in case the stock does continue moving
A nice hedged trade on the stock would be the March 40/42 bear
call credit spread. In this trade you would sell the March 40
call while buying the same number of March 42 calls for a credit
of 30 cents. This trade has a target return of 17.6%, which is
45.7% on an annualized basis (for comparison purposes only). With
MO currently trading at $37.50, this trade has upside protection