Thursday, March 7, 2013

BEAV: Bullish on aircraft interiors

Update: I've closed my bull position in BEAV after the price moved below the 10-day price channel at $58.24. The trade, structured as long shares, yielded 5.4% from the initial entry price and 4% from the overall basis. (I added to the position three times after the initial entry.)

B/E Aerospace Inc. (BEAV) broke above its 20-day price channel on Wednesday, generating a bull signal as the price challenges its pre-recession high. The breakout above the channel boundary, $54.33, continues a leg up that began last August from $36.51 and has carried up to to today's high so far, $55.34.

BEAV has broken above its price channel 18 times since the broad markets began their post-recession recovery in early 2009. Ten of those breakouts were profitable, with an average yield of 10.2%. Adjusting the yield by the 55.6% success rate gives a score of 5.7%, above the 5% minimum I prefer.

The price has produced two bull signals since the present leg up began in August, both of them profitable, with an average yield of 9.3%.

B/E Aerospace, headquartered in Wellington, Florida, builds products used in the interiors of aircraft, including seats, oxygen and lighting systems, water and waste systems and de-icing systems. Its customer list is a roster of the world's major airlines.

Analysts in aggregate are optimistic about BEAV's prospects, giving the stock a 47% enthusiasm rating.

B/E Aerospace reports return on equity  of 14% -- below growth-stock territory but still respectable. Debt is a bit on the high side, at 90% of equity.

The company has been profitable for at least the last 12 quarters and has seen earnings rise steadily for most of that period. Earnings have surprised to the upside 11 times and to the downside, once.

Institutions own 92% of shares. It takes $1.86 in shares to control a dollar in sales.

BEAV on average trades 1.2 million shares a day. That's not enough liquidity to produce a tradeable options grid under my rules. Open interest is in the two- and three-figures near the money, but the $5 gap between strike prices and a quickly widening bid/ask spread means that options aren't on the table for me.

For example, the front-month at-the-money bid/ask spread on calls, with a delta of 54, is 3.3%. That's OK. But move up one strike to the 100 delta, and the spread widens to 26.1%. I can't really construct positions with those numbers.

So it's shares or nothing with BEAV, and shares have a 2 cent spread, which is nothing on a $55 stock.

Options, however, are useful for other purposes than trading.

Implied volatility stands at 22%, in the bottom half of the six-month range. It has been falling the past few days following a huge dip in late February.

In the following analysis I use the statistical concept of a standard deviation, boundaries that encompass 68.2% of trades surrounding a reference price.

BEAV options are pricing in confidence that 68.2% of trades will fall between $51.72 and $58.72 in the next month for a potential gain or loss of 6.3%, and between $53.54 and $56.90 over the next week.

Today's option trading shows speculation to the upside. Calls are trading at 65% above their five-day average volume; puts are trading at just below three-fourths of the average.

The fair-price zone on today's 30-minute chart runs from $54.98 and $55.32, encompassing 68.2% of transactions surrounding the most-traded price, $55.11. The stock has traded in the upper half of the zone for most of the first 2-1/2 hours of trading.

B/E Aerospace next publishes earnings on April 22.

Decision for my account: I've opened a bull position in BEAV, structuring it as long shares.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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