Earnings Set Up a Triple Digit Profit Opportunity
After jumping on earnings, this stock could deliver a gain of almost 140%. Let’s start by looking at the earnings. PR Newswire reported, MasTec, Inc. (NYSE: MTZ) today announced better than expected third quarter financial results and increased 2019 annual earnings guidance.”
The stock jumped to a new high on the news.
The announcement continued, “Third quarter 2019 revenue was $2.02 billion, compared with $1.98 billion for the same period last year.
GAAP net income increased 8% to $130.1 million, or $1.69 per diluted share, compared to $120.5 million, or $1.52 per diluted share, in the third quarter of 2018. GAAP results exceeded the Company’s previously announced diluted earnings per share expectation by $0.12.
Third quarter 2019 adjusted net income, a non-GAAP measure, increased 26% to $132.8 million, compared to $105.2 million for the same period last year.
Adjusted diluted earnings per share, a non-GAAP measure, increased 30% to $1.73, compared to $1.33 in the third quarter of 2018, exceeding the Company’s previously announced third quarter 2019 expectation by $0.11.
Third quarter adjusted EBITDA, also a non-GAAP measure, was $252.1 million, compared with $226.3 million in the third quarter of 2018, an 11% increase.
Third quarter adjusted EBITDA margin was 12.5%. Third quarter adjusted EBITDA also exceeded the Company’s previously announced 2019 third quarter guidance expectation by approximately $6 million.
The Company also announced 18-month backlog as of September 30, 2019 of $7.5 billion, an approximate $300 million decline when compared to the third quarter of 2018.
Backlog as of September 30, 2019 does not include approximately $700 million in awards signed during the third quarter that are estimated to be realized beyond the 18-month period utilized in backlog.
Jose Mas, MasTec’s Chief Executive Officer, commented, “We had a strong quarter and exceeded our earnings expectation with a 110-basis point improvement in adjusted EBITDA margin.
We are pleased to raise our annual earnings guidance expectation, despite lower than originally expected third and fourth quarter Oil & Gas revenue, as regulatory delays on one large project caused shifts in construction activity and revenue to 2020.”
Mr. Mas continued, “As we look forward into 2020 and beyond, we remain bullish about our growth prospects, with great visibility and strong demand for our Oil & Gas, Communications, Power Generation & Industrial and Electrical Transmission segments.
We believe our growing end markets will allow us the opportunity to extend both our geographic base as well as our service offerings.”
Mr. Mas concluded, “We are entering one of the most exciting advancements in the history of telecommunications. The deployment of 5G wireless technologies will create opportunities for the consumer, our customers and for MasTec.
We are pleased to announce that we recently completed a fourth quarter acquisition that will expand our services to include wireless network integration, engineering and optimization, uniquely positioning MasTec to offer full “end-to-end” capabilities for our wireless customers.”
Based on the information available today, the Company is providing initial fourth quarter guidance, and updating full year 2019 guidance expectations. The Company currently estimates full year 2019 revenue of approximately $7.2 billion.
Full year 2019 GAAP net income and diluted earnings per share are expected to approximate $385 million and $5.05, respectively. Regarding full year 2019 expectations for non-GAAP measures, adjusted EBITDA is expected to approximate $842 million or 11.7% of revenue and adjusted diluted earnings per share is expected to be $5.16, a 37% increase over 2018.
For the fourth quarter of 2019 the Company expects revenue of approximately $1.7 billion. Fourth quarter 2019 GAAP net income is expected to approximate $92 million with GAAP diluted earnings per share expected to approximate $1.21.
Fourth quarter 2019 adjusted EBITDA, a non-GAAP measure, is expected to approximate $209 million with adjusted diluted earnings per share, a non-GAAP measure, expected to approximate $1.25.
The long-term charts shows the stock’s pattern of moving on earnings and then continuing to trend in the same direction.
A Trade for Short Term Bulls
As with the ownership of any stock, buying MTZ could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for MTZ
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For MTZ, the December 20 options allow a trader to gain exposure to the stock.
A December 20 $70 call option can be bought for about $2.20 and the December 20 $75 call could be sold for about $0.72. This trade would cost $1.48 to open, or $148 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $148.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in MTZ the maximum gain is $3.52 ($75 – $70= $5; $5 – $1.48 = $3.52). This represents $352 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $148 to open this trade.
That is a potential gain of about 137% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.