Pall Corporation (NYSE: PLL) earnings play

Pall Corporation (NYSE: PLL), while maybe not the most exciting story on the Street, has its place in global fluid management, including filtration, separation, etc.  Their products are a part of many industrial markets including food and beverage,  oil and gas, even municipal water filtration (to name just a few).  As we become a “more green” society, PLL may stand to benefit.

More News On PLL

• PLL

• Pall Corp. completes $500 million credit agreement
  July 14, 2010
• Pall completes $375M debt offering
  June 18, 2010
• Pall expects $370M from debt refinancing
  June 15, 2010

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Pall reports earnings tomorrow and I wanted to offer investors a look into PLL’s history as well as a way to protect into the number tomorrow.

The nine analysts that cover PLL are expecting earnings to come in between $0.46 and $0.49, with the consensus coming in at $0.47.  PLL recently raised its quarterly dividend 10.3% to 16 cents per share.  The stock falls right between the buy and hold ratings, with most issuing a neutral rating of sorts and one-third of the analysts rating the shares a strong buy.

In the past, the actual earnings date has been quiet; it has been the day after the fact when during which PLL tends to move.  The past four earnings events have seen movements as follows: +8.6%, +1.9%, +7.8%, -17%. PLL has a tendency to move higher, but this is only about 65% of the time.  Its bullish moves outweigh its bearish tendencies over earnings.

Since 2007, PLL has only missed analyst’s projections in two quarters, occurring in the second quarters of 2008 and 2009.  Second-quarter earnings are due tomorrow.

At 23 times trailing earnings, the stock may seem a bit rich here and it has had a tremendous run since its recent low of $33.50 back around February 11th. The stock has stalled here in the past week and a half and even with the lack of movement, average implied volatility remains elevated at 35.5%, with the 30-day historical coming in around 28%.

All of the moving averages are at $35.00 or below… that may be where support is, if PLL drops.

Based on what the stock has done in recent weeks and the history of its Q2 earnings report, I would approach with caution, although we are seeing strength in the macro recovery, which should feed PLL’s earnings as well, as production/usage may be rising.

It really boils down to p/e, which I think is a bit rich, therefore, I am looking at an aggressive covered call, Selling the April 40 call for $2.20 and buying the April 35 put for 20 cents.  This will be a net credit of $2.00 and will reduce cost basis in the stock by that amount.  Because the call has 90 cents of parity (intrinsic value), I am actually only capturing $1.10 in time value if PLL rallies from here.

In other words, if PLL rallies from this point, I may be required to sell my stock at $40.00, but since I received $2.00 to do this trade, it’s the equivalent of selling PLL at $42.00, which is still $1.10 higher than where we are right now.

If the stock drops, I will buy back my call and sell my put, hopefully for a profit and retain my stock position.

Please be sure you understand the risks associated with any trades that I discuss and ensure that the trade suits your thesis.