Meta Platforms (META) gained more than 23% in Thursday trading on better-than-expected Q4 2022 results.
The social media company’s stock experienced volume more than 4x higher than the 30-day average. Its option volume wasn’t quite over-the-top at 568,632, 1.3x more elevated than the 30-day average, but it did have 11 different calls and puts in the top 100 contracts with volume-to-open-interest ratios of more than 1.5.
Meta’s relative success is undoubtedly something to dwell on as Big Tech struggles to engage investors as it once did. However, I saw two stocks worth considering as long-term investments and delivered unusual options on Thursday.
It’s Time to Reap What You Sow
First up is a maker of tractors and combines.
I’m talking about CNH Industrial (CNHI), the London-based maker of agriculture and construction equipment with a history dating back to 1842. Its two big brands: Case and New Holland, came together in a 1999 merger. The rest is history.
CNH Industrial reported strong Q4 2022 results on Thursday, so it’s no surprise that its options were unusually active.
Excluding currency, the company’s industrial revenues were 31% higher to $6.35 billion, while its adjusted EBIT (earnings before interest and taxes) for its industrial activities were 80% higher than in Q4 2021. Free cash flow was also considerably higher in the quarter.
For all of 2022, its industrial revenues were 25% higher to $21.54 billion, with an adjusted EBIT of $2.43 billion, 38% higher than a year ago. In 2023, CNHI expects 8% sales growth at the midpoint of guidance, with free cash flow for its industrial activities of $1.4 billion, down $200 million from 2022’s monster year.
Based on its $1.4 billion projection and a market cap of $21.9 billion, CNHI has a free cash flow yield of 6.4%. Anything between 4% and 8% is a reasonable value. Over 8%, and you’re into value territory. It’s close.
As for the unusually active option, I’m looking at the Jan. 19/2024 $17.50 call contract. On Thursday, it had a volume of 1,295, 10.53x its open interest. The ask of $1.75 is a reasonable 10% of its strike price. Based on a delta of 0.51955, CNHI stock has to appreciate nearly $3.40 over the next 351 days to double in value.
The shares closed at $16.32 on Thursday. The share price should increase by at least 18% over the next year to exercise the call. I like its chances.
Dollar Tree’s In the Middle of Big Change
I recently discussed the CEO change at Dollar Tree (DLTR). Rick Dreiling, the former CEO of its biggest rival, Dollar General (DG), was Executive Chairman. On Jan. 25, Dreiling added CEO to his business card, and the nearly decade-younger Mike Witynski moved on to his next adventure.
Ultimately, the change was a good one. So did Jefferies analyst Corey Tarlowe, who felt Dreiling’s experience at retail turnarounds was just what was needed at Dollar Tree.
Historically, it has been the company’s ill-fated multi-billion-dollar purchase of Family Dollar in July 2015 -- $8.5 billion to be precise -- from genuinely reaching its full potential as a discount store operator.
Today, Dollar Tree and Family Dollar’s annual revenues are split 54/46. However, while both banners had very healthy same-store sales growth in the recent quarter -- 8.5% for Dollar Tree and 4.1% for Family Dollar -- that’s where the similarities end.
In Q3 2022, Dollar Tree’s gross margin was 35.4%, 12 percentage points higher than Family Dollar's. Further down the income statement, Dollar Tree’s operating margin was 13.3%, while Family Dollar’s was -0.6%.
There’s no comparison between the two.
Dreiling’s most significant task will be to find a way to make Family Dollar more profitable.
The problem is that the banner’s sales mix won't make the new CEO’s job very easy. Dollar Tree’s sales are split evenly between consumables (food) and non-consumables (birthday cards, deodorant, school supplies, etc.). The margins are much higher for non-consumables.
Meanwhile, Family Dollar’s split is consumables (75%) and non-consumables (25%). Most of its customers are middle- to lower-income households, so it won’t be easy without alienating your core customer.
If anyone can do it, Dreiling’s proven he knows how to operate discount stores.
As for unusual options activity for DLTR, I’m looking at the May 19 $155 call contract with a $12.95 ask. Normally, I would shy away from a hefty ask price, but this stock is good to own in all economic environments.
The delta is 0.59508. Based on the ask, the shares need to rise by nearly $22 for the ask to double in value over the next 106 days. That’s 14% from Thursday’s closing price of $157.02. While it’s certainly possible -- its shares are up 11% over the past month -- Dreiling probably will need to deliver a plan of action before its May expiration.
Would I pay nearly $168 [$155 strike + $12.95 ask] for DLTR stock? If I’m holding for 3-5 years, I absolutely would.
Have a great weekend!
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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