MorningWord 5/17/17: All Cisco Systems Go?

by Dan May 17, 2017 10:37 am • Morning Word

Tonight after the close Cisco Systems (CSCO) will report their fiscal Q3 results. The options market is implying about a $1.25, or 3.7% move in either direction between now and Friday’s close. That can be figured by dividing the price of the weekly at the money straddle (the at the money put + the at the money call premium) by the stock price. With the stock at $34 the May 19th weekly 34 straddle is offered at $1.25, if you bought that, and thus the implied movement between now and Friday’s close you would need a rally above $35.50, or a decline below $32.75 to make money.

Shares of CSCO have outperformed the S&P 500 (SPX) in 2017, actually doubling its performance (+12% vs +6%), but mildly lags the Nasdaq’s 13% gain. Not too shabby, but it’s worth noting that while the Nasdaq Composite closed yesterday at an all-time high, CSCO remains nearly 60% from its 2000 levels. At some point in 2010, the fortunes of the stock diverged from that of the Nasdaq. It’s important to remember that CSCO was the Facebook of the era for all intents and purposes:

Bloomberg

Shares of CSCO trade well below a market multiple at about 14.5x expected fiscal 2018 earnings which are expected to grow at best mid single digits, with low single digits sales growth. The company has a killer balance sheet, 40% of their $170 billion market cap in cash, 20% net of debt, buy back billions of dollars of shares a quarter and pay an annual dividend that currently yields 3.4%

Shares of CSCO have consolidated since its mid-February breakout to new 52 week highs in front of their fq2 report, and while the recent high end of the 3 month range might serve as near-term technical resistance, given the tone of the market today, investors might be looking down at what looks like very healthy technical support at the prior breakout level at $32:

Bloomberg

It’s been my view that CSCO could be a massive beneficiary of the president’s proposed pro-growth agenda, benefiting from lower corporate tax rates/repatriation, de-regulation, and infrastructure spending. But most of that seems like a pipe-dream, maybe we get a foreign tax amnesty in 2017, but I suspect that is it.  Oh and the reflation trade in global growth is obviously a plus, and the weakness of the U.S. dollar in 2017 as the company gets more than a third of its sales from overseas, and much of its expected growth.

So what we have here is a cheap stock, strong balance sheet, a company willing to make acquisitions to diversify from legacy technologies and frankly low expectations. But there is nothing sexy here, and I suspect the results will reinforce the recent consolidation, and it a move inside the implied move seems like the most likely outcome for this week. While a beat and raise likely establishes a new range above the prior highs (but not off to the races), I suspect a miss and guide down causes investors to shoot first and ask questions later.

The twenty-year chart shows the stock right at the prior high from just before the financial crisis, and playing for a massive long-term breakout looks like a decent set up in a market a % from the all-time highs. We will detail some defined risk strategies prior to results.

Bloomberg

 

We’ll check back in on trade ideas before the print.