Security software firm FireEye hits upper rail of downward sloped channel ahead of earnings

FireEye (Nasdaq: FEYE) is a security software firm that provides cybersecurity solutions to customers. The software allows organizations to prepare for, prevent, investigate, respond to, and remediate cyber-attacks. The company and the stock have been struggling in the past year with the company seeing earnings decline while the stock has trended lower.

The company is set to report third-quarter earnings results after the market closes on October 29, but that hasn’t been good for the stock in recent quarters.

Let’s look at the fundamentals first. The company lost $0.01 per share in the second quarter and analysts expected the company to earn $0.01. The company broke even in the second quarter of 2018. Analysts expect the company to earn a penny per share for the third quarter and that is down from EPS of $0.06 in the third quarter of 2018. For the year analysts expect earnings to decline by 78% compared to 2018.

Revenue has grown in the last few years, but at a slower pace than most companies. FireEye’s average annual revenue growth rate has been 7% for the last three years and revenue was up by 7% in the second quarter. Third quarter revenue is expected to show an increase of 5%.

The management efficiency measurements are below average with an ROE of 2.6% and a profit margin of 2.7%. If we had these figures together with the sales growth, we get the SMR rating from Tickeron. FireEye’s SMR rating is 81 currently and that indicates weak sales and an unprofitable business model. SMR (Sales, Margin, Return on Equity) rating is based on comparative analysis of weighted Sales, Income Margin and Return on Equity values compared against S&P 500 index constituents.

The Tickeron Profit vs. Risk Rating for FireEye is 100, indicating that the returns do not compensate for the risks. The company’s unstable profits reported over time resulted in significant drawdowns within these last five years. A stable profit reduces stock drawdown and volatility. The average Profit vs. Risk Rating for the industry is 74, placing this stock worse than average.

Looking at the daily chart for FireEye we see that the stock has been moving lower within a trend channel over the last nine months and the stock just hit the upper rail of the channel.

The 10-day RSI is in overbought territory and the daily stochastic readings are both in overbought territory.

In addition, the higher Bollinger Band was broken on October 9. A price fall is expected as the ticker heads toward the middle band. According to Tickeron, in 26 of 38 cases where FireEye's price broke its higher Bollinger Band, its price dropped further during the following month. The odds of a continued downtrend are 68%.

If you look at the gaps lower in February and July, both of those drops occurred after earnings reports. That doesn’t exactly inspire investors ahead of the third quarter report.

If there is a saving grace for FireEye investors it is that the sentiment is pretty bearish which indicates expectations are pretty low. Out of 25 analysts covering the stock, only 12 rate the stock as a “buy” while the other 13 rank it as a “hold”. The short interest ratio is pretty high at 8.34.