Cisco Systems, Inc. (NASDAQ:CSCO) will report earnings Wednesday after the close, and longs are hoping the results are enough to keep up Cisco’s market-beating 2017. So far this year, CSCO stock is up more than 13%, and it’s almost 30% better over the past year.
Despite the rally, Cisco shares still yield an impressive 3.4%.
Cisco is in the midst of a multi-year “transition.” I say transition instead of turnaround because its business isn’t bad, per se … it’s just that it can’t boast much in the way of growth at the moment. That’s illustrated by analysts’ expectations for sales to fall 1.8% this year and grow just 2.3% in 2018. Essentially, 2018’s revenues will be almost flat compared to 2016’s results.
Earnings aren’t much better, with expectations for sub-1% EPS growth in 2017. Next year, though, analysts expect profits to improve by 5% and accelerate after that. Current estimates calls or 10% annual EPS growth over the next five years.
Admittedly, Cisco CEO Chuck Robbins is positioning the company in higher growth markets, rather than just networking and switches. Without abandoning Cisco’s legacy business, Robbins is looking at areas such as artificial intelligence, the cloud and cybersecurity.
Without larger acquisitions, these areas will likely represent fast growth but a small drop in the bucket overall due to Cisco’s size.
At least in the short-term.
So What Do We Do With Cisco?
Cisco is a great stock to own — if you’re already long. CSCO stock has not only climbed by double digits so far in 2017, but it has digested much of that rally and worked off its overbought condition. Strong price action, consolidation and yield are all attractive components.
Fundamentally, I also like Robbins’ focus on adding new growth segments, as well as the company’s nearly $72 billion in cash and short-term investments, which give Cisco many options to make growth-oriented decisions (read: M&A kindling).
In a way, Cisco stock reminds me of Apple Inc. (NASDAQ:AAPL). Yes, the former doesn’t sport nearly the growth prospects of Apple … but it does have a low valuation, tons of cash and is seeking out new growth markets rather than just sitting on its hands.
Cisco’s valuation isn’t astonishing, but it’s certainly on the low end; CSCO stock trades at 13 times forward estimates.
But as long as those estimates are low, Cisco is very much a “show me” stock.
Like I said, Cisco is a great stock if you already own it. That makes it a very solid “hold.” As for the buy or sell? I wouldn’t do either. At least not yet.
Trading CSCO Stock
Let’s take a look at the charts to figure out some important levels.
Click to Enlarge
You can also see that the MACD (orange oval) has consolidated the move and is regaining bullish momentum.
These are two attractive features on this chart.
If I could have it my way, CSCO stock would decline after earnings to our teal line, which is notable for three reasons:
- It marks the stock’s prior breakout level from February.
- Cisco found support here in mid-April.
- It’s where the 100-day moving average comes into play and should act as support.
Monday’s rally was encouraging, but it clearly pulled off the highs. It seems as though Cisco is having trouble getting above the $34.50 level.
I wouldn’t short CSCO stock because the risk/reward does not seem worth it. For it to be worth it, Cisco shares would need to decline to the 200-day moving average, a fall of about 10%. While that would be a great level to buy at, I just don’t see that move materializing unless earnings are extremely disappointing.
The most prudent move right now? If you’re already long, hold. If you’re not, wait for a better entry point. I’m personally a likely buyer on a decline to $32.50.
Bret Kenwell is the manager and author of Future Blue Chips. He can be found on Twitter via @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
