IM [$16.91] showed $0.41 for their June quarter versus $0.20 in 2009 and guided for $0.41 for Q3 against last year’s $0.29. Zacks recently raised it full year EPS goal to $1.87 /share. Current expectations for 2011 are running $2.07.
That puts IM’s multiple at just 9x this year’s and 8.2x 2011’s earnings – about the lowest valuations ever for this world leader in wholesale distribution of computer products and services.
The shares bottomed below $15 just a few weeks ago and now are in a clear uptrend again. With both the 2010 and 2011 estimates at all-time record levels I see no reason why IM can’t exceed its old highs from 2004 – 2008 when it peaked each year between $20 and $22.50.
I’m willing to play for a move to at least $20 by March 19, 2011 by putting on this buy/write combination:
Cash Outlay | Cash Inflow | |
Buy 1000 IM for $16.91 /share | $16,910 | |
STO 10 Mar. $20 calls at $0.40 /share | $400 | |
STO 10 Mar. $20 puts at $3.40 /share | $3,400 | |
Net Cash Out-of-Pocket | $13,110 |
If Ingram Micro moves up to $20 or better [+18.3%] by March 19, 2011:
· The calls will be exercised and the puts will expire.
· You will sell your shares for $20,000.
This best-case scenario would result in a profit of $20,000 - $13,110 = $6,890.
$6,890/$13,110 = + 52.5%
Achieved in just 7.5 months on shares that only needed to rise by at 18.3%.
If IM remains below $20 on March 19, 2011 you’ll end up with 2000 shares of Ingram at an average cost basis of $16.56 /share – a 2.06% discount to the August 2nd closing price.
More conservative investors could buy the shares while writing the March 2011 $17.50 calls and puts.
Cash Outlay | Cash Inflow | |
Buy 1000 IM for $16.91 /share | $16,910 | |
STO 10 Mar. $17.50 calls at $1.20 /sh. | $1,200 | |
STO 10 Mar. $17.50 puts at $1.70 /sh. | $1,700 | |
Net Cash Out-of-Pocket | $14,010 |
In this case any move up to $17.50 or higher [+3.5%] by March 19, 2011 would see the calls exercised and the puts expiring.
The profit would be $17,500 - $14,010 = $3,490.
$3,490/$14,010 = + 24.9% achieved on any rise of 3.5% or better over the 7 ½ month time horizon for this trade.
Should IM fail to finish above $17.50 you’ll end up owning 2000 IM at an average cost of $15.76 or 6.8% below our trade inception price.
Disclosure: Author is long IM shares and short IM options.
Dr. Paul Price
www.OptionsProfits.com
www.BeatingBuffett.com
