Pre-Earnings Pessimism Palpable on The Procter & Gamble Company


Cincinnati-based consumer goods guru The Procter & Gamble Company ( PG ) will release its fourth-quarter report ahead of the open on Monday, Aug. 3. Analysts are looking for a profit of 73 cents per share for PG. The company has an outstanding track record in the earnings confessional, beating the consensus estimate in each of its last four quarterly reports.

Ahead of PG's earnings report, however, option players are not too optimistic. In the past two weeks, speculators on the International Securities Exchange (ISE)/Chicago Board Options Exchange ( CBOE ) have bought to open 2.7 puts for every call. This ratio of puts relative to calls represents an annual high, revealing that speculators on the ISE/CBOE have never initiated bearish bets faster during the past year.

In the same bearish vein, short interest jumped 8.8% during the past two weeks. However, these bearish bets account for a scant 1.1% of PG's available float, suggesting that there is ample room for pessimism to grow.

Technically speaking, option players have reason to be skeptical of PG. The stock has added just 1.7% in 2010, which is no surprise, given that PG has followed a horizontal pattern of movement since November 2009. During this time, the equity has been range-bound in the $60-to-$64 neighborhood, with the upper rail of this range serving as staunch technical resistance.

Weekly Chart of PG Since October 2009

Interestingly enough, it seems that one put player is counting on PG to soon slip beneath the lower rail of its trading range. Early this morning, 3,500 August 60 puts traded at the ask price, revealing they were likely purchased. With open interest at this strike exceeding today's volume, however, we cannot yet confirm whether these puts were, in fact, purchased to open.

If this trader did, indeed, buy to open these August 60 puts, then he is either bearish and hoping that PG will sink beneath the $60 level in the near term, or he's an anxious shareholder who is guarding his stock in the event of an unexpected pullback. With earnings just over the horizon, either of these scenarios is possible.

In light of PG's gold-star performance in past earnings reports, analysts may be expecting another blowout report. In fact, the brokerage bunch is very optimistic about PG, with Zacks reporting that 16 of the 23 analysts following the company call it a "buy" or better. Similarly, the stock's 12-month price target is pegged at a lofty $70.24 -- territory not explored by PG since October 2008.

With the brokerage bunch having lofty expectations for PG, the stock may need to hit it out of the park in order to satisfy this group's outlook. Should PG only hit a single, price-target cuts could indeed break the stock free from its trading range -- pushing the shares beneath round-number support at $60.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Options

Referenced Stocks: CBOE , PG

Schaeffer's Investment Research

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