Wednesday, July 11, 2012
MetroPCS Comm (PCS) - Elevated Vol, Rising Stock, Skew Reflects Upside Potential in Earnings Report or a Takeover?...
PCS is trading $6.57, up 1.4% with IV30™ down 2.6%. The LIVEVOL® Pro Summary is below.
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MetroPCS Communications, Inc. (MetroPCS Communications) is a facilities-based wireless broadband mobile communications provider in the United States, including the Atlanta, Boston, Dallas/Fort Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco, and Tampa/Sarasota metropolitan areas.
This is a vol and stock note with earnings approaching. Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
There's a lot going on with the stock, and I've highlighted three areas over the last six months.
1. On 2-23-2012 the stock popped off of an earnings report (BMO). But, the few days following the news, the stock came back down to the original price and then below the pre-earnings price. Here are some news snippets that shed light on the rise and fall in that few day period.
MetroPCS fourth-quarter profit jumps, beats expectations; stock at highest level since August
Source: AP via Yahoo! Finance; MetroPCS 4th-quarter profit jumps, shares respond
Sprint's board of directors, after months of work on a deal to acquire pre-paid wireless company MetroPCS, has decided to walk away from the deal, according to CNBC sources.
The two companies were just hours away from announcing an acquisition of MetroPCS by Sprint in a deal that would have given MetroPCS shareholders Sprint shares as well as a small amount of cash.
According to David Faber, who broke the news, the deal would have valued MetroPCS at a roughly 30 percent premium to its stock price, before Thursday's big move up on better than expected earnings.
Source: CNBC via Yahoo! Finance; Sprint Board Rejects MetroPCS Deal at Last Minute
NEW YORK (AP) -- Shares of MetroPCS Communications Inc., the country's fifth-largest cellphone company, fell Wednesday after it said it would introduce a $30 mail-in rebate for new phones.
THE ANALYSIS: UBS analyst John Hodulik downgraded MetroPCS share to "Neutral" on Wednesday, saying he expects higher costs to acquire subscribers to persist through the year. Increasing competition and higher gas prices, which weigh heavily on low-income households, also darken the outlook, he said.
He cut his price target on the shares to $11 from $15.
SHARE ACTION: The shares fell 72 cents, or 6.5 percent, to $10.30 in afternoon trading. The stock gave back nearly all of the boost it got after MetroPCS released fourth-quarter results on Thursday. That report had indicated the company was keeping tight lid on marketing expenses.
Source: AP via Yahoo! Finance; MetroPCS shares down on new phone discount
So a lot going on in a short-period of time, but ultimately the stock sort of stayed where it was before the news ever came out.
2. On 5-9-2012 the stock rose from $6.56 to $7.50 (14%). Here's that news snippet:
MetroPCS climbs on reports company is in talks with Deutsche Telekom about sale
NEW YORK (AP) -- Shares of MetroPCS Communications Inc. jumped Wednesday on a report the company is in talks to sell itself to Deutsche Telekom AG.
Bloomberg News reported Wednesday that Deutsche Telekom may acquire MetroPCS in an all-stock transaction, and combine MetroPCS with its T-Mobile USA division. It said Deutsche Telekom could pursue other companies or sell T-Mobile USA. Earlier this year Sprint Nextel Corp. reportedly considered buying T-Mobile.
Source: AP via yahoo! Finance; MetroPCS jumps on reports of possible sale talks
That pop proved to be short lived as by 5-15-2012 (six calendar days later), the stock was trading below the $6.56 level.
3. Finally, I've highlighted the recent price action where the stock has risen from $5.59 on 6-26-2012 to now $6.57, or 18% higher in just a few weeks.
On the vol side, we can see how the implied dipped in late Jun, but since then has been rising abruptly as the stock has also risen. On 6-22-2012, the IV30™ was 45.58% and is now at 83.05% or 82% higher. The implied is now trading well above both the short-term and long-term historical realized vols. The vol comps are:
The 52 wk range in IV30™ is [38.985, 87.18%], putting the current level in the 91st percentile (annual). Earnings are due out (confirmed) on July 26th, which is in the Aug expiry cycle but outside of July.
Let's turn to the Skew Tab to examine the month-to-month and line-by-line vols.
There are two interesting phenomena here and one that's kinda obvious.
1. Aug vol is elevated to Nov -- that's simply a reflection of the risk inherent in the earnings announcement on July 26th.
2. Jul vol is actually elevated to Aug -- that's weird in that Jul doesn't have the earnings announcement and points to the reality that the option market reflects greater near-term risk (next week and a half) than it does out to Aug (with earnings). Just to be clear though, it does not mean that the risk reflected in Jul options is greater than the single day risk of the earnings announcement.
3. The most interesting phenomenon is the skew shape difference between Aug and Nov. Aug shows an upside skew -- the OTM calls are priced to higher vol then the OTM puts and the ATM options. In English, the option market reflects greater upside risk (potential) than downside risk in PCS for the Aug expiry cycle (with earnings). Tricky in that Nov shows a normal skew shape (the opposite). To read about skew you can go here:
Understanding Option Skew -- What it is and Why it Exists
Finally, let's turn to the Options Tab, for completeness.
We can see the monthly vols are priced to 85.48%, 82.20% and 64.83%, respectively, for Jul, Aug and Nov. With the upside skew in Aug, it feels like the option market has priced in the potential for another takeover rumor/run or possibly an earnings report that pushes the stock up. Ya know.. or not...
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This is trade analysis, not a recommendation.