Great Expectations

Foxconn Has Traders' Trust

Analysts have raised estimates ahead of this week's earnings. Now it's up to Apple's biggest supplier not to disappoint.
APPLE INC
-7.08
At Closing, April 20st
165.72 USD

Traders seem decidedly unconcerned that Apple Inc.'s largest supplier may deliver a nasty earnings report even though both companies have just had their worst sales performance in at least 15 years.

According to Bloomberg Gadfly analysis, short interest on Hon Hai Precision Industry Co. is an average 27.4 million shares ahead of its fourth-quarter profit announcement, expected as soon as Thursday afternoon Taipei time. 1 That's the lowest 10-day pre-earnings average since the first quarter of 2015.

Confidence Indicator

Traders hold the narrowest short positions on Hon Hai ahead of earnings in almost two years

Source: Bloomberg, Markit

Note: Tracks average short-interest for the nine days prior and one day after earnings (except 4Q2016).

Apple, which accounts for half of Hon Hai's sales, recorded its first revenue decline since 2001 last year. The Taiwanese company, also known as Foxconn, had its first annual sales drop on record.

Short interest is now down to levels not seen since June 2015, when Hon Hai was wrapping up its third consecutive quarter of net income growth exceeding 27 percent. Earnings went on to fall for four of the next five quarters.

Despite being Taiwan's second-largest company, Hon Hai refuses to hold investor conferences, issue an outlook or even provide a revenue breakdown. That opacity creates a black box for investors and analysts, with an average earnings surprise of 14.1 percent. Stock reaction has been most severe when analysts who updated their estimates in the lead up to earnings were most caught out.

Expect the Unexpected

Hon Hai often misses estimates, with the wildest stock reactions coming when net income falls outside the most recent predictions

Source: Bloomberg

Note: Standard estimate includes all valid data. 28-day estimate includes only those analysts who've updated or confirmed numbers in the four-weeks prior to earnings.

This quarter, sell-side analysts have raised their net income estimate by 2.7 percent over the past four weeks. If short interest is any indication, traders also remain confident. Now it's just up to Hon Hai not to disappoint.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Gadfly calculated the average of outstanding short-interest for nine days prior to, plus the one day after, each quarterly earnings announcement for 14 quarters.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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