Cisco Systems Looks To Grind Upward Following Earnings Disappointment

May 11, 2012 4:26 PM ETCSCO
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Contributor Since 2010

TradingBlock provides investors regular market commentary and outlooks from market analysts and educators like Stutland Volatility Group, Dan Sheridan of Sheridan Mentoring, and TradingBlock's own market strategist Tim Biggam. Market analyst outlooks for individual stocks are entered into our patent-pending TradeBuilder strategy scanner to generate and rank stock and option strategies based on their expected profit/loss and probability of breaking even or better.

Tim Biggam, TradingBlock (May 11, 2012, 3:09 pm CDT)

Symbol Analyst Target Price Target Date
CSCO 18.00 July 20, 2012

Cisco Systems, Inc. (ticker: CSCO) designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology industry worldwide. It offers routers that interconnect IP networks for mobile, data, voice, and video applications; switching products, workstations, IP phones, access points, and servers; application networking services; and home networking products. The company also offers products for security, storage area networking, and collaboration, plus video connected home products and wireless systems.

While CSCO disappointed with their latest earnings announcement, especially on guidance, the subsequent reaction has been overdone. The stock has dropped over 12% from 19 to under 17, and now sports a very reasonable trailing P/E of nearly 12, with a forward P/E under 10. CSCO also has nearly 9 dollars per share in cash, which puts their ex-cash multiples at bargain basement levels.

While growth has most certainly tempered, CSCO still is growing at a 6% pace. The stock also has a nearly 2% yield, which is equivalent to 10-year US Treasuries. While the upside may be somewhat limited over the near-term, at these levels think the downside is also limited, especially given the cash hoard.

I look for CSCO to wander aimlessly for the next few months, with a slight retracement back to the 18 level by July expiration.

Play of the Day

Based on Cisco's (ticker: CSCO) current market price of $16.50 and using a target price of $18.00, a target date of July 20, 2012 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.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Jul Call +92% 44%
Buy Aug Call Spread +43% 61%
Sell Aug Put Spread +40% 61%
Buy Stock +9% 55%

* Click link to access TradeBuilder details on Must have Instant or Actual account. Subject to change due to changing market conditions. Click here to view risks regarding selling stock short.

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. He currently does not hold any positions in CSCO.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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