Name That Trade – $CSCO: Chambers on the Hot Seat?

by Dan February 9, 2015 1:47 pm • Commentary

Cisco Systems (CSCO) reports their fiscal Q2 Wednesday night after the close, the options market is implying about a 4% one day move in either direction vs the 4 qtr avg of about 3.5% and the 8 qtr avg of 5.5%.

Back in mid December, I took a look at CSCO (Name That Trade: $CSCO’s CEO Gots To Go) when the stock was about the same spot:

And then there is Cisco Systems (CSCO).  The stock, like ORCL trades well below a market multiple, and below INTC and MSFT.  Unlike all three, the CEO who presided over the company during the web bubble is still at the helm, and to be honest, seems wildly out of touch with what tech investors are looking for in this day and age.  While the stock is up 22% in 2014, it is only up 100% off of the 2009 lows, vs the S&P500 which is up 200%. The stock remains 70% below its 2000 bubble levels:

CSCO 15yr chart from Bloomberg

Watching the bounces in other mega-cap tech stocks like INTC, MSFT, & ORCL since high-level management changes It was my view at the time that CEO John Chambers may not be the guy to orchestrate a turnaround:

CSCO trades at almost 13x current year’s expected earnings that are supposed to grow only 3% on 3% sales growth. The company pays a dividend that yields 2.8%, a monster buyback fueled by a massive cash balance of $52 billion ($31 billion net of debt), equal to 37% of their market cap.  If there was ever company that needed to simplify their offerings, get rid of some legacy businesses and get up to speed with some new secular trends it would be CSCO, and John Chambers is NOT the guy to do it.  Almost any outsider will do in my opinion.  This sort of announcement would have the stock up 10% in a week, and likely 25% in 6 months (in a market similar to the one we are in now).

Since I wrote this in December, INTC & MSFT are down 10%, and is ORCL down about 5%.  CSCO is about unchanged, displaying some decent relative strength and up almost 10% since reporting their fiscal Q1 in mid November that saw above consensus results with a beat on sales, eps and gross margins.  The quarter and commentary highlighted positive revenue trends in North America and Europe, as enterprise was a strong spot while the company continues to be dogged by weakness in emerging markets.

Looking at a round-up of analyst comments following the Nov results (from Barron’s Tech Trader), it seems that bulls are focused on continued enterprise strength in the developed world, and “improving trends” in emerging markets.


Since mid November the commodity crash has caused massive cutbacks in capex at many related businesses, and the surging dollar (measured by the DXY) is up almost 8% against a basic of major currencies. This could weigh heavily on CSCO’s more than 40% revenue exposure outside North America.  So we could see a slight change of tone, or a possibly inline to slight miss, despite what many analysts thought was fairly achievable guidance given weak year over year comparisons.

Vol Snapshot: Despite options prices being very near where they were prior to the last three reported quarters, the implied move looks fairly reasonable

CSCO 1yr chart of 30 day at the money IV from Bloomberg
CSCO 1yr chart of 30 day at the money IV from Bloomberg

Given the potential headwinds to guidance that weighed on MSFT,and appear to be hurting semiconductors, I would much rather buy the move than sell it.

For instance, with the stock at $27.30, if you were to buy the Feb13th weekly 27.50 straddle for ~$1.25, (long the 27.50 call for .55 and the put for .70), you would need a move below 26.25 or above 28.75 to break-even by Friday’s close.

Technicals: a quick look at the 6 month chart shows what is likely resistance at $28.75, the prior 52 week high (green line), and support down at $26 the last two lows in Jan and Dec, which is just above the stock’s 200 day moving avg (yellow line):

CSCO 6 month chart from Bloomberg
CSCO 6 month chart from Bloomberg


Potential Trades:  for those that think the move is priced cheap, the long straddle could be a way to play for an out-sized move, but generally buying event moves is a low probability way to make a living, .

For those who think the headwinds from the strong dollar and weak emerging markets could cause the company to change its tune for forward guidance, then the Feb13th weekly 27 puts offered at .53 seem dollar cheap 2 days ahead of the print (stock ref $27.25).

For those looking to play for a beat and raise, and a breakout above the prior highs, the Feb13th weekly 28 calls at .32 seem dollar cheap (stock ref $27.25).

I would add that just like owning an event move, agnostic to direction is a low probability trade, even in a low vol name like CSCO, playing directionally can be just as hard as you need to first and foremost get the direction right, and then the magnitude of the move, and then the timing, which is one reason why we generally avoid weeklies as you may be right on direction, but sometimes it takes the market a little time to get the magnitude right.

We are going to take a closer look prior to the event on Wednesday night.  So stay tuned.  As for the longer term view that we discussed in mid December, I stick by all of that, I just don’t expect anything on that front in the very near term. The stock is very cheap, and they have the potential to beef up their buyback and dividend that yields 2.7% with their $31 billion in net cash, or 22% of their $139 billion market cap.  If the company were to whiff on the qtr and forward guidance I expect CEO John Chambers could be on the hot seat very quickly.