Well, I was looking for something to short and this just dropped in my lap.
GD was just turning it around this year, adding $800M in cash on slightly improved sales over last year. I had been looking at them as a buy since they have come off their high of $121 in October and have come to a rest at the 200 dma of $111.
All that just changed though as the company announced it will pay a 33% premium to acquire ANT for cash. This isn’t just all the cash GD has, it’s another $1Bn they have to borrow!
Now Anteon is an OK company and a nice fit with General Dynamics but this company only earned $61M last year and should earn about $80M this year. The company had a p/e of 20 but, for some reason, GD thought they’d rather pump that up to 28 for the purchase.
GD investors have already been ponying up a p/e of 16 this year and I just don’t think they are the type of people who want to see the company go $1Bn in debt to add 7% to the bottom line.
Being an option expiration day, I am loving the $110 puts for .30 if they can be had for that little. This is a very risky trade but could work out well if an analyst doesn’t like this deal.
The most sensible trade is the Jan ’07 $120 puts for $11 (a $3 premium) which is also a play on inevitable cutbacks in military spending. This trade should be exited at $10 because that means the stock is really heading the wrong way. That contingency can also be covered by picking up the Jan $115 calls for $1.20 which is what I was going to recommend before they made this deal.
If you couple the Leap purchase with the Jan calls, you can even offset that by selling the Jan $105 puts for .50 but that would limit the upside too much for my taste.
In any event, $108 is my downside target which should boost the put by about $3.
