Options Trade for Wednesday 
Cisco Systems, Inc. (NASDAQ:CSCO) Calls 
Wednesday, February 25, 2015

** OPTIONS TRADE FOR WEDNESDAY: Buy the CSCO Jul 2015 30.000 call (CSCO150717C00030000) at or under $1.15, good for the day. Place a protective stop limit at $0.45 and a pre-determined sell at $2.00.

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by Ian Harvey

February 25, 2015

Introduction

**Cisco and the Internet of Everything!**

Cisco Systems, Inc. (NASDAQ: CSCO), which designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provides services associated with these products and their uses, has become leaner and is now a more focused, and with its use of scale advantages and significant customer switching costs provides the company with better competitive advantages in its core markets.

Also, adding to its standing recently is the very positive company fiscal second quarter results on the 11th February -- with revenue of $11.9 billion (up 7%), net income of $2.4 billion (up 68%) or $0.46 per share (up 70%). Cash flows from operations were $2.9 billion for the second quarter of fiscal 2015, up from $2.5 billion for the first quarter of fiscal 2015, and flat when compared to the second quarter of fiscal 2014.

In addition, the company also announced an increase in its quarterly dividend of $0.02 to $0.21 per common share. The dividend is payable on April 22, 2015 to all shareholders of record as of the close of business on April 2, 2015.

Technical Oulook

Cisco Systems, Inc. has a 52-week low of $21.27 and a 52-week high of $29.66. The stock has a 50-day moving average of $27.78 and a 200-day moving average of $26.04.

The company has a market cap of $151.5 billion and a price-to-earnings ratio of 17.51.

Earnings

Cisco Systems last announced its earnings results on Wednesday, February 11th. The company reported $0.53 earnings per share for the quarter, beating the analysts’ consensus estimate of $0.51 by $0.02. The company had revenue of $11.90 billion for the quarter, compared to the consensus estimate of $11.08 billion.

During the same quarter last year, the company posted $0.47 earnings per share. Cisco Systems’ revenue was up 7.0% compared to the same quarter last year. On average, analysts predict that Cisco Systems, Inc. will post $2.16 earnings per share for the current fiscal year.

Cisco's huge earnings-per-share improvement despite the aforementioned single-digit revenue increase was primarily the result of CEO John Chambers and team paring excess, and unneeded, overhead. Gross margin in Cisco's fiscal Q2 tells the story. A year ago, Cisco reported gross margin of $5.95 billion -- and by the 2015 second quarter, gross margin has jumped to nearly $7.1 billion.

In other words, Cisco generated just shy of $800 million more in revenue, but its gross margin improved by over $1.1 billion, resulting in its strong per-share earnings. Continued share buy-backs also helped -- Cisco has about 82 million shares less outstanding than it did in the year-ago Q2.

The company has a return on equity of 15.3% slightly lower than 17.7% for the Communication Equipment sector. It is noted that earnings per share (EPS) has grown by 7.2% on average for the last 5 years, indicative of consistent growth in earnings.

The price-earnings ratio of Cisco Systems Inc stands at 17.7, which is lower than the sector average of 36.7, a good point for the company.

Also, Cisco Systems has a debt to equity ratio of 36% which is a reasonable figure and is below the Communication Equipment sector average of 50% -- meaning that the company is not too much reliant on the outside funding to finance its growth. The company also has a current ratio of 3.39.

Positive Factors!

1. CEO John Chambers and team have made it clear: the future lies with executing on its cloud, mobile, and the Internet of Things (IoT) initiatives.

Cisco's shift to IoT, or the Internet of Everything (IoE) as per Chambers, took hold last quarter and was cited as a driving force behind its record-breaking results.

2. Last quarter, Cisco signed up yet another global metropolis -- in this case, Santiago, Chile -- to transform it into a "smart city." Hamburg, Berlin, and a host of other cities are already onboard.

Smart cities are expected to become a $1.5 trillion market in the next 10 years, and Cisco is leading the way as it has a jump-start on longtime rivals like Hewlett-Packard and IBM.

3. Cloud-related data centers are another area of potential growth for Cisco, where it once again runs up against HP and IBM, the current industry leaders. But if calendar Q3 of 2014 is any indication, Cisco is making up ground in a hurry. It can't match HP's or IBM's total server revenues -- yet -- but while both lost market share in Q3, Cisco improved over 30% compared to the year prior.

4. The company's liquid assets are presently $53 billion cash hoard vs. $150 billion equity capitalization at $29 a share creates a unique foundation of liquid value for stockholders. Few other blue-chip investments have such a conservative balance sheet, with $68 billion in current assets at the end of January vs. just $47 billion in TOTAL liabilities.

5. Compared to the ultra-high valuations of the S&P 500 today on trailing financial ratios, with P/E ratios approaching 20x, Cisco's 14x EPS remains quite inexpensive. In addition, by subtracting the large cash hoard, the stock remains extremely cheap. On an adjusted basis, taking out $10 in cash per share (not earning much income, with interest rates near zero), the stock is trading closer to 10x operating income after taxes. The 7.5% in free cash flow yield generated annually ($11 billion per annum the last two years) by Cisco on $29 a share is a high, stable, and a growing number going forward.

Analysts Opinions

Research analysts at Sanford C. Bernstein set a $34.00 price objective on shares of Cisco Systems stock in a report released last Thursday. The firm currently has a “buy” rating on the stock. Sanford C. Bernstein’s price objective indicates a potential upside of 16.00% from the company’s current price.

A number of other research reports have been presented recently, these are as follows:-

• 2/13/2015 – Cisco Systems had its price target raised by analysts at Argus from $30.00 to $36.00. They now have a “buy” rating on the stock.

• 2/12/2015 – Cisco Systems was downgraded by analysts at Vetr from a “hold” rating to a “sell” rating. They now have a $28.00 price target on the stock.

• 2/12/2015 – Cisco Systems had its “buy” rating reaffirmed by analysts at Cantor Fitzgerald. They now have a $33.00 price target on the stock, up previously from $31.00.

• 2/12/2015 – Cisco Systems had its “neutral” rating reaffirmed by analysts at Zacks. They now have a $28.00 price target on the stock. Zacks’ analyst wrote, “Cisco Systems is the leading provider of IP-based networking and other products. The company’s second-quarter earnings were above the Zacks Consensus Estimate. Also, order growth in new markets remained encouraging. Despite the increasing competition, we are positive about the company’s market position, innovative prowess, product range, growth initiatives and dividend payout. Additionally, overall growth prospects remain positive because of the drive toward cloud computing and increasing data flow on carrier and computing networks. Given these factors and the reasonable valuation, we are reiterating our Neutral recommendation on CSCO shares.”

• 2/12/2015 – Cisco Systems had its price target raised by analysts at MKM Partners from $26.00 to $30.00. They now have a “neutral” rating on the stock.

• 2/12/2015 – Cisco Systems was given a new $27.25 price target on by analysts at Jefferies Group. They now have a “hold” rating on the stock.

• 2/12/2015 – Cisco Systems had its price target raised by analysts at Deutsche Bank from $32.00 to $33.00. They now have a “buy” rating on the stock.

• 2/12/2015 – Cisco Systems had its price target raised by analysts at RBC Capital from $29.00 to $31.00. They now have an “outperform” rating on the stock.

• 2/12/2015 – Cisco Systems was given a new $20.00 price target on by analysts at Credit Suisse. They now have a “sell” rating on the stock.

• 2/12/2015 – Cisco Systems had its price target raised by analysts at Wunderlich from $28.00 to $29.00. They now have a “hold” rating on the stock.

• 2/12/2015 – Cisco Systems was given a new $33.00 price target on by analysts at Piper Jaffray. They now have a “buy” rating on the stock.

• 2/12/2015 – Cisco Systems had its price target raised by analysts at Oppenheimer from $29.00 to $30.00. They now have an “outperform” rating on the stock.

• 2/12/2015 – Cisco Systems was given a new $32.00 price target on by analysts at Nomura. They now have a “buy” rating on the stock.

• 2/3/2015 – Cisco Systems had its “buy” rating reaffirmed by analysts at Deutsche Bank. They now have a $32.00 price target on the stock.

• 2/3/2015 – Cisco Systems had its price target raised by analysts at Oppenheimer from $27.00 to $29.00. They now have an “outperform” rating on the stock.

• 1/22/2015 – Cisco Systems was given a new $32.00 price target on by analysts at Deutsche Bank. They now have a “buy” rating on the stock.

• 1/22/2015 – Cisco Systems had its price target raised by analysts at Piper Jaffray to $33.00. They now have a “positive” rating on the stock.

• 1/16/2015 – Cisco Systems was given a new $32.00 price target on by analysts at Northland Securities. They now have a “buy” rating on the stock.

• 1/14/2015 – Cisco Systems had its price target raised by analysts at Barclays from $26.00 to $29.00. They now have an “equal weight” rating on the stock.

• 1/12/2015 – Cisco Systems had its price target raised by analysts at Deutsche Bank from $30.00 to $32.00. They now have a “buy” rating on the stock.

Three investment analysts have rated the stock with a sell rating, ten have issued a hold rating and twenty-five have issued a buy rating to the stock. The company has a consensus rating of “Buy” and an average price target of $29.10.

Conclusion

At the end of June 2014, Cisco was assigned an A1 rating by Moody's along with a stable outlook. The rating was based on the company's financial strength and its broad and innovative product line. The company maintains very strong liquidity.

The company's liquidity provides it with the ability to return value to its shareholders through regular share repurchases and dividends.

Considering Cisco's continued transition to new markets, including cloud and IoE, the revenues will come.

Nearly across the board, Cisco delivered. Higher revenues, more efficiently run operations, and continued growth in Cisco's newly defined direction should provide a positive for this options recommendation.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE FOR WEDNESDAY: Buy the CSCO Jul 2015 30.000 call (CSCO150717C00030000) at or under $1.15, good for the day. Place a protective stop limit at $0.45 and a pre-determined sell at $2.00.


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