Monday, August 6, 2012

Best Buy (BBY) - Stock & Vol Pop on Unsolicted Bid; But This Isn't Equilibrium

BBY is trading $19.55, up 10.8% with IV30™ up 12.2%. The LIVEVOL® Pro Summary is below.


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Best Buy Co., Inc. is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services.

This is a vol and stock note with some market moving news in BBY. Here's the scoop:

Best Buy Co. shares surged after founder and former Chairman Richard Schulze proposed to buy the 80% of the electronics retailer he doesn’t already own for up to $8.84 billion, but the shares’ upside suggested some investor skepticism Monday.

The shares retreated their earlier advance and lately rose 11% to $19.54, below Schulze’s proposed price range of $24 to $26 a share. The valued was calculated based on the 339.9 million shares outstanding as of June for Richfield, Minn.-based Best Buy

Analyst David Strasser at Janney Capital Markets said he thinks Best Buy could be valued at close to $30, which means there would be a need for Schulze to come up with more than $3 billion in additional equity.

Best Buy’s share upside also sent rivals’ shares higher, with RadioShack Corp. RSH+1.45% adding 1.5% and HHGregg Inc. HGG-0.16% was flat.

Best Buy confirmed it’s received the “unsolicited indication of interest” from Schulze and said it will be discussed with financial and legal advisors including J.P. Morgan and Goldman Sachs.

The share price reflected investor concerns about whether the deal would get through as Schulze didn’t offer any firm commitments of financing, analysts said.

Source: MarketWatch via Yahoo! Finance; Investors eye Best Buy bid with skepticism

So there you have it. A $24-$26 bid reflected in the stock market as sub $20 equilibrium (for now). A Wall Street Journal story (written by JOAN E. SOLSMAN AND SAABIRA CHAUDHURI) reported that when Best Buy confirmed the unsolicited bid it was a "... highly conditional indication of interest."

It's that language that I believe is keeping the share price well below the bid price. Let's turn to the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see that BBY has been a poor performer over the last six months. In fact, before today's move up on the bid, the stock is down 30% in the last six months and 25% YTD. With the move, those numbers are down 23% and 16%, respectively. Over the last two years, the stock is down 50% from Friday's close and 45% as of this writing. So, in English, it's been bad 'n stuff.

On the vol side, we can see how elevated the implied has been even before this news and how much more elevated it is today. The 52 wk range in IV30™ is [29.46%, 70.98%], putting the current level in the 90th percentile (annual). Other than the levels just seen in the May earnings cycle, the implied right now is well into multi-year highs. In English, the unsolicited bid isn't seen as a risk reducing takeover (vol usually collapses on takeover bids), but rather as an irritant to risk (a catalyst). That's fairly unusual and speaks to the ambiguity in the bid (details, details, details).

Let's turn to the Skew Tab, below.

This is a beautiful skew chart in that it summarizes the risk reflected by the options market in great simplicity. The vol is elevated from the back to the front, reflecting greater near-term risk to medium-term. But even more apparent, the OTM calls in Aug are bid relative to the ATM options and OTM puts. In English, the option market reflects greater upside risk (potential) than downside, but only in Aug. The options are priced to reflect the possibility of higher equity prices in Aug. Very cool.

To read more about skew and what it is, you can read this article:
Understanding Option Skew -- What it is and Why it Exists

Finally, let's turn to the Options Tab, for completeness.

Across the top we can see the vols are priced to 70.52%, 66.09% and 51.92%, respectively for Aug, Sep and Dec. My best guess is that this ~$19 equity price and ~68% vol are both moments in time -- neither is near the eventual or short-term equilibrium. And by short-term, I mean even as soon as in the next few days.

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