New Trade – $CTXS: GoToBeating

by Dan October 21, 2013 3:09 pm • Commentary

Almost two weeks ago following CTXS’s negative pre-announcement I commented in the MorningWord (below) on the fairly dramatic technical damage done on the stock going from what was new 52 week highs to nearly new 52 week lows, covering a nearly a 25% range in just a few weeks.  In the press release detailing the Q3 miss that saw revenues down about 3.5% and eps down about 6% from prior guidance and consensus, there were no reasons given for the disappointing results.

CTXS is set to report Q3 results and issue guidance for the current quarter Wednesday after the close, the options market is implying about a 5% move in either direction, this comes after the one day decline on Oct 10th of ~12.5%.  Q3 at this point is baked in the cake, and the reasons for the weak results and Q4 guidance will be the main event.

Now some 8 trading days from the pre- announcement,  the stock is getting extremely oversold as it hovers near the lows of the last 2 years.

CTXS 2yr chart from Bloomberg
CTXS 2yr chart from Bloomberg

On a shorter term basis the downward momentum appears to be abating a bit as the daily volume is declining and the stock is trying to find some footing.  While the stock could lift on the slightest bit of better than expected news, $60 could serve as a bit of short term resistance.

CTXS 1yr chart from Bloomberg
CTXS 1yr chart from Bloomberg

MY VIEW:  With only guesses as the fundamental issues troubling the company, many are likely fairly well known from macro to soft enterprise demand, to secular issues relating to pc sales and increasing competition in desktop vitalization.  Earnings growth hit a road-bump in 2013, after years of mid to high teens growth, this year the company is only supposed to grow 5%.  If the company is able to re-accelerate growth and show confidence in the consensus for 14% year over year growth in 2014, then the stock trading at 16.6x next years estimates seems fairly reasonable relative to its historical averages.

While I have little confidence that the company will be able to offer guidance that calms investors, it would take a meaningful guide down to have the stock re-test the 2011 lows near $50.

I want to set up a trade that would benefit from a 5-10% bounce in the near term but also a consolidation give or take 5%.  Call calendars look attractive as implied vol is elevated on a near term basis into earnings this week.  I want to look to sell the implied move for earnings and look to finance the purchase of longer dated calls that could benefit from investors coming back into some laggards in early 2014. So here’s the trade:

TRADE: CTXS ($57) Bought Nov / Jan 62.5 Call Calendar for 1.00

-Sold 1 Nov 62.50 call at .55

-Bought 1 Jan 62.50 call for 1.55

Break-Even on Nov Expiration:

-Profits are maximized at 62.50 on Nov expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Max risk is $1.00

Trade Rationale:   CTXS has followed a pattern of bouncing at or near these levels on 3 previous occasions. It’s unlikely that the earnings event will produce major news coming so soon after a pre- announcement. With that in mind it makes sense to sell near term in order to own longer term calls. Ideally the stock won’t do much of anything on the report but continue to base. Any breakdown from these levels puts the structure at risk but the sale of November calls would quickly go to zero in that case and the Jan calls won’t, so any losses on a breakdown will not make the structure worthless.  This is a fairly low risk way to help finance the purchase of longer dated calls.



MorningWord 10/10/13:  From The 2013 Highs To Lows In A Quick – $CTXS

With the rhetoric cooling in DC, and the S&P 500 futures up nearly 1% it would appear that we may be in for a less volatile period in the coming weeks, except for the fact we have just started to get results for Q3 earnings.  The markets may calm with some sort of kick the can solution to the government shutdown and debt ceiling standoff, but don’t think for the second it is going to be that easy for shareholders of single stock names that disappoint on results and forward guidance.

Take CTXS for example.  Last night, the software vendor pre-announced worse than expected Q3 results, guiding revenues down about 3.5% and eps down about 6% from consensus.  The stock is trading down about 12.5% in the pre-market.  Here is the thing that sticks out to me like a sore thumb – the stock just made a new 52 week high on Sept 20th, and with today’s opening looking near $58, the stock is getting dangerously close to making a new 52 week low that was put in back in Nov 2012 and right at the low of 2013 (below).

CTXS 1yr chart from Bloomberg
CTXS 1yr chart from Bloomberg

This is fairly volatile price action to say the least for a $12 billion market cap company, but the long term chart might have been signalling a fairly large break one way or the other. The 4 year chart below shows the triangle pattern that has been building and with this morning’s break-down, could signal a new range for the stock btwn $50 and $60 if it can’t make a stand and hold $60 today.

CTXS 4 yr chart from Bloomberg
CTXS 4 yr chart from Bloomberg

The long-term weakness of the technical picture could be indicating significant fundamental problems for this once high-flying company.  CTXS is certainly facing increased competition, in both its conferencing business (Google Hangouts is free) and on the security and network side.  As Enis noted in his Deep Dive on competetor $FFIV last month:

If services are becoming an increasing part of the revenue mix, but are less profitable, then future earnings growth prospects might be too optimistic.  In addition, operating margins have moved lower as well, potentially indicating that the services revenues are more expensive to come by, and require more sales and marketing.

FFIV is trying to combat competition with increased innovation, and its past success speaks to its ability to perform.  But the continued drop in product sales is an obvious long-term concern for this former high-flier.  For now, I’d still be more interested in selling strength than buying weakness.

And FFIV is the relative leader in the sector.

CTXS is one more infrastructure tech company to fall by the wayside in 2013.  As we’ve noted before, the Nasdaq rally has not really been led by technology companies, especially old guard technology.  Worth watching as we hit the heart of earnings season.