Guest Analyst: Tim Biggam, TradingBlock (May 31, 2011, 2:15 CDT)
|Symbol||Analyst Target Price||Target Date|
|CSCO||$20.00||Dec. 15, 2011|
Cisco Systems (ticker: CSCO) shares have been crushed lately, with a nearly 30% decline over the past year. CSCO is trading at levels not seen since the overall market lows of March 2009.
We think Cisco offers a compelling value play. CEO John Chambers has a good shot at turning around the company and getting Cisco's growth engine revving again. Shares have been weak as of late, but a return to its core focus should permit Cisco shares to re-approach $20 by year's end. Citigroup recently forecast a return to IT growth rates to 1.5-2x’s GDP growth. Cisco should be a benefactor of the expected increase in IT spending since they are still the goliath of data networking equipment.
CSCO is trading at a forward P/E of 9.8, which is a significant discount to the overall market multiple, as well as its competitors, like JNPR. Using metrics based on enterprise value, Juniper is valued at 23.5x based on EV/EBITDA (Enterprise Value-to-Earnings Before Interest, Taxes, Depreciation, and Amortization). This is above the industry median though less than the industry average. Cisco has an EV/EBITDA multiple of 10.8X. At this level, Cisco is approaching significantly undervalued levels.
For Cisco, we think the appropriate multiple for EV/EBITDA is 11.5X and for 2.60X EV/Sales (Enterprise Value-to-Sales). This puts the valuation target for Cisco is in the range of $18-$22 by year end.
Play of the Day
Based on Cisco's (ticker: CSCO) current market price of $16.70 and using a target price of $20.00, a target date of December 15, 2011 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date. Powered by TradingBlock's TradeBuilder.
|Analyst Target Outlook||$20.00 by Dec. 15, 2011|
|Strategy (click for details)||% Return at Target||Probability of breaking
even or better
|Buy Jan Call Spread||+205%||43%|
|Buy Jan Call||+152%||38%|
|Sell Jan Put Spread||+79%||59%|
* Subject to change due to changing market conditions.
DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.