Earnings are Coming, What's an Investor to do?

By Matthew DiLallo - July 20, 2012 | Tickers: EPD, F, LINE, MPW, PETS | 0 Comments

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The financial news flow has seemed to cool off as the summer has heated up.  That’s about to change, especially for those following my paper trading portfolio, “No Drip, No Mess” Portfolio. Over the past two weeks we’ve looked at how dividends to drive returns and how Options: Less About Sizzle, More About What’s at Stake, today we’re going to take a sneak peak at the earnings of companies in the portfolio that are just around the corner.  But first, a little bit of news that did hit the wires on two of our portfolio companies.

We’ve written puts on Enterprise Products Partners (NYSE: EPD) in hopes of buying the units a little bit cheaper as we’re trying to “capture their large distributions that will only get larger over time.”  Last week that company did just that as they raised the distribution by 5% over last year’s rate.  Now if we’re assigned on our puts we’d be buying at a 6.4% yield.  Our puts however don’t expire until December so in the meantime we’ll keep watching and waiting.  With the company’s units now 7% higher than our strike price we’ll need to see the price come down in order to lock in that distribution.  Until then we’ll be content with the premium’s we took in from the puts.  They don’t report earnings until August first so we’ll put the company on the back burner for now.

In other non-earnings related news, portfolio holding Medical Properties Trust (NYSE: MPW) announced last week that they’ve restructured all 10 of their existing leases with top tenant Prime Healthcare.  As part of the restructure into a master lease structure, they’ve simultaneously entered into a cross-collateralization and cross default provisions with three mortgaged Prime hospitals.  Medical Properties also funded a new $100 million dollar mortgage loan for another Prime hospital.  The big change though is in the annual escalators which were limited in prior leases.  They are now increased to reflect 100% of CPI increases with a minimum floor.  For all intents and purposes this restructuring provides even more security for the long term cash flow coming from their biggest tenant.  We’re looking for stable dividends in the portfolio and that’s exactly what this helps to ensure. 

With that out of the way, it’s on to a look at the earnings that are heading our way.  First up is PetMed Express (NASDAQ: PETS) on July 23^rd.   For the portfolio we’ve written puts on this volatile small cap and shares are currently in the money by about 8%.  With the puts expiring in September this earning’s report will be key in determining whether or not we’re assigned shares.  The upcoming quarter is traditionally their highest earning quarter of the year.   Analysts are expecting revenues to increase by 4.4% year-over-year with a corresponding 4.5% increase in earnings putting those numbers at $76.8 million on the revenue line and earnings of $0.23.  If earnings come in at anything less than those numbers, we’ll more than likely be assigned on our puts.  We want to own the shares so the only bad outcome for us would be a huge earnings beat leaving us without shares and no options to write new puts.

Up next is Ford (NYSE: F) which reports on July 25^th.  We have a bit of a unique position on Ford with a covered straddle that expires in September as well as some uncovered shares.  We’re treating Ford as an income position with upside and this earnings report will be but one of many in what I hope will be a long term profitable relationship with the company.  For the earnings report we’ll be watching to see how Ford is doing overseas and if they are experiencing any slowdown domestically.  Analysts are expecting earnings of around $0.28 a share for the quarter.  However, 10 of the 11 analysts have revised their estimates lower over the past four weeks so a miss is not out of the question.  Either way, we’re hoping to continue to write options on our shares for a long time while also capturing some of the upside when their sales and profits do turn around. 

Finally, we’ll see LINN Energy (NASDAQ: LINE) deliver their earnings report on July 26^th.  We have written puts on LINN that expire in October.  Our puts are currently 14% out of the money as the market seems to like LINN’s recent shopping spree.  With the way LINN hedges their commodity exposure, we’re not looking for much deviation in their earnings reports.  What we will keep an eye on is their proposed LinnCo IPO as well as how they are doing integrating the $3 billion dollars of assets they’ve bought this year. 

Earnings season each quarter can be overwhelming with reports streaming in and stocks moving instantly.  Yet as long term investors, the key is to look at them for what they really are, a snap shot in time that’s just one data point of many to come over the years.  I’ll of course analyze each snapshot and consider the new information carefully, but we’ll let our positions keep producing income and not worry too much about the daily gyrations of the stock prices.

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