Cisco (CSCO) longs can use covered calls to generate extra income in the near-term.
Traders treated the company’s FY3Q results with a big yawn yesterday. In a strong day for the general market, CSCO shares shed one percent, as an early attempt to push into the green was sold off hard in the first half hour.
Briefly, it earned $0.54 a share on $12.1 billion in revenues in the quarter. Consensus estimates were $0.53 and $12.06 billion, respectively.
FY4Q guidance was right in line. Management said revenue will rise by one to two percent year-over-year and that EPS will come in between $0.55 and $0.57. The sell side was expecting $0.56 EPS on two-percent y/y growth on the top line.
Depending on one’s bias, the quarter probably offered something for both bullish and bearish camps.
U.S. order growth was strong, with a book-to-bill above one. Service provider and emerging markets remained challenged. The service provider video business declined five percent during the quarter. CSCO’s core routing and switching businesses are slowing down. Growth opportunity lies in such areas as data center, security, and wireless.
These were decent results, but not enough to wow the sell-side. There are still 15 sell’s/hold’s, as opposed to 26 buy’s/strong buy’s. There was one downgrade post-earnings – Sterne Agee to neutral from buy, even as Wells Fargo (outperform) raised price target to a range of $34 to $38 from a prior range of $33 to $36.
The point is, the sell side was neither bowled over nor let down by the results. For the last three months, consensus estimates for the July and October quarters, as well as FY15 and FY16 have been stuck at $0.56, $0.55, $2.16 and $2.26, respectively.
Going into the earnings, the stock rallied 11 percent in six weeks, which was impressive given a 15-percent increase in short interest between mid-March and end-April (from 39.4 million to 45.2 million).
It is probably time to digest that move. The market giveth and the market taketh away. The post-earnings reaction is not promising, at least near-term. Conditions are already overbought on a daily basis.
Nimble longs will probably use this as an opportunity to generate income using options. A 29-strike covered call going out a week (May 22nd weekly) earns $0.33 in premium. This will add to the 2.9-percent dividend yield (in FY3Q, CSCO paid out $1.1 billion in dividends and bought back $1 billion in stock).
The worse that could happen is, if the stock starts attracting bids in the next six sessions, it gets called away at an effective price of $29.33. In the intermediate-term, this may not be such a bad thing anyway. CSCO shares have been struggling to get back above the broken October-2014 trendline for nearly two months now, and have carved lower highs to boot (chart above).
Thanks for reading!
