VMware Inc (VMW) has been trading in the range of $65.02 – $84.77 over the past 30 days. The stock, showing support around $72.40 and resistance at $83, is trading above the 50-day and 200-day moving averages, with an RSI (14) of 73.66. Figure 1 below shows that the stock opened the trading session on July 24 above a very important resistance level of $80, which is also a very important psychological level. The 20-day SMA line has also crossed up the 50-day SMA line and is heading upward, also true for the MACD signal line.

Bottom line? Our indicators give a positive view on VMW.

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A LOOK AT FUNDAMENTALS

VMW’s short-term bullish technical indicators are supported by strong fundamentals, as well.
The company reported that it earned $244.1 million, or 0.57 cents per share, for the quarter that ended June 30. That’s up from $191.7 million, 0.45 cents per share, for the same quarter last year. Revenue increased 1.1 percent, to $1,243 million from $1,123 million.
VMW’s consensus earnings per share for the quarter ending September 2013 are 0.51 to 0.63 cents per share. GAAP operating margin was 21.7 percent, compared to 18.9 percent in the second quarter of fiscal 2012. The increase is mainly due to decrease in costs. Cash flow from operating activities was $534 million, compared to $391 million in the second quarter of fiscal 2012.

VMW PE stands at 45.67, above the industry average of 18.53 and the S&P 500 average of 18.59.  The company is currently trading above the preferable P/E ratio of 15x and, over the last five years, the company’s shares have traded in the range of 27.78x to 144.10x trailing 12-month earnings. VMW’s current Price/Sales of 7.35 is above the average of its industry, of 1.25.  VMW’s head-to-head comparison to its main competitors shows that the company has better gross margin and operating margin than most of them, and the second highest EPS.
The stock is currently trading 38% below its intrinsic value of $134.76, which suggests that the stock is undervalued at these levels. The beta of 1.47 implies higher volatility of the stock with respect to the S&P 500.

DEBIT CALL SPREAD

Technical and fundamental indicators both show short-term bullish signals for VMW.  Investors should consider the following debit call spread: Buy September 2013 82.5 Calls at $3.50 and sell September 2013 85 Calls at $2.30. The net debit to start is $1.20, and we recommend holding until spread price reaches $2.40.  This strategy will allow traders to collect time premium for out-of-the-money short calls and decrease the overall cost of the initial investment.

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