Continuing last week's mission of looking at upcoming earnings to establish option positions, here is another attractive opportunity. CheckFree ( CKFR), the electronic payment company, is scheduled to report earnings after the close on Thursday. It is expected to earn 31 cents per share on $182 million in sales for its fiscal second quarter of 2005. That would represent a 21% increase over the year-ago period. The stock's price-to-earnings ratio has contracted along with its growth rate in recent years; at $37, the stock is trading around 28 times this year's earnings, down from the Internet-like multiple of 50 it was sporting back in 2000. The earnings growth rate has slowed from 80% per year during the prior five years, and is expected to drop to the midteens over the next few years.
But the plus side to this slowdown, which should be expected as a company matures from its initial hyper year-over-year growth rate, is that CheckFree is now on solid ground and appears poised to settle in as a reliable and steady performer. After a few somewhat erratic years, the company has now been very consistent in delivering on-target results and guidance. It has beaten estimates by an average of 6% in five of the last six quarters. I expect the company to meet its numbers Thursday, and another solid quarter should supply the base for the stock to work higher in coming weeks. With the stock at $37, a purchase of the February $35/$40 call spread looks attractive here. The spread can be bought for a net debit of $2.30 (pay $3 for the $35 call, receive 70 cents for the sale of the $40 call), providing a reasonable risk/reward. The maximum loss is equal to $2.30, or the net debit; the maximum profit is $2.70, or the cost minus the differential between the strike prices. The maximum profit is achieved if CheckFree is above $40 at the February expiration.