Name That Trade – $CSCO: All Systems Go?

by Dan May 12, 2015 1:54 pm • Commentary

Event: Cisco Systems reports fiscal Q3 results tomorrow after the close, the options market is implying about a 4.5% one day move which is a tad shy of the 4 qtr avg of about 5%.

Price Action / Technicals: The stock is up a little more than the Nasdaq Composite ytd, up 5.5%, and down about 3% from the 52 week and the seven year highs made in early March:

CSCO 10yr chart from Bloomberg
CSCO 10yr chart from Bloomberg

On a ten year basis it looks like we have a fairly well defined range between $30 ish and $15.  Looking back at the last 17 years though, $30 is a massive level, was resistance in 1999 before quickly rising nearly 200% before topping out in 2000.  On a few occasions in the last 12 years the stock has attempted a breakout, but been unable to do so:

CSCO since 1998 from Bloomberg
CSCO since 1998 from Bloomberg

Fundamentals:  Back in February, following CSCO’s fiscal Q2 results, management sounded increasingly bullish about the recovery in their core switching and router businesses and strength in Europe, and the potential for a turn in emerging markets, one of the reasons for their stock’s 9.4% one day gains post results.  Shortly after the results, and considering a speech President Obama gave in Silicon Valley at the White House Summit on Cybersecurity and Consumer Protection, I considered the opportunities for CSCO in the cyber-security space, which in the last quarter, security revenues grew only 6% year over year, to $411 million (a very small percentage of their total revenues), but almost as much as the $425 million in sales that FireEye registered in all of last year.  I suspect this will be a heavy focus for CSCO as it is probably a safe bet that CSCO’s networking equipment is already very much embedded into our entire intelligence/ defense infrastructure and most governmental agencies. And CSCO is the sort of company that our government feels comfortable awarding mission critical contracts to.

That’s all fine and good, but there is not likely to be too many fireworks in CSCO’s very near future as long time CEO John Chambers just announced his retirement, to be replaced by another long time insider Chuck Robbins, who will takeover on July 26th.  I would be very surprised to see too many surprises on tomorrow’s call as I suspect Chambers will not have his last call as the company’s CEO marred by a big miss and or guide down.  I would also suggest that it will take months, if not quarters to see any major changes from the course that Chambers has set the company on.  So the stock could remain rangebound.

MY VIEW:  The stock looks poised for a long term breakout on a beat and raise, while an inline qtr and mild guide down likely has the stock back below $28.  The stock is cheap, trading 13x expected eps and sales growth of about 5%.  The company is likely to be a mid single digit grower from here on out with the occasional double digit print.  With a 2.86% dividend yield, massive buyback, 30% of their market cap in cash (20% net of debt), the stock feels like a fairly safe long in the low growth, low rate environment we are in and very levered to the potential for reflation of global growth with almost 50% of their sales coming from outside the U.S.

We’ll start looking at potential trades and update before the event if we see something we like.