Networking hardware manufacturer Cisco Systems, Inc. (NASDAQ: CSCO) recorded a new yearly high of $39.88 on Friday, following a stock upgrade by analyst Tal Liani, an analyst at Bank of America Merrill Lynch. It is also the highest traded price in 17 years. Based on the reasons provided for the upgrade, we anticipate the uptrend to continue in the week ahead.
In a note to clients, Liani said the company is in the early stages of becoming a software-focused company and the market will soon offer a better valuation to Cisco. He further underlined that Cisco’s shift is not something that is happening now, but the passage of the tax reform bill and anticipation of an increase in capital expenditures have provided the best opportunity for the company to steer along the new path.
Liani is also of the view that the latest technological developments such as Internet of Things, digitisation of enterprises, and 5G has opened doors to more revenue for Cisco’s multi-cloud, SaaS, and hybrid on-premises solutions. So, Cisco may not find it difficult to achieve 30% of its total revenues from software in fiscal 2020. Thus, Cisco can be expected to generate a 6% earnings per share compounded annual growth rate from 2018 through 2020.
The stock is trading at 12x the EV/FCF (Enterprise Value/Free Cash Flow). That is cheap compared to S&P, which trades at 25x the EV/FCF. Further, the Cisco is trading at a lower valuation compared with other networking and large cap tech stocks.
Based on the above facts, Liani upgraded Cisco’s stock to “buy”, from “neutral”, with a price target of $46. Thus, fundamentally, the stock is expected to move up in the days ahead.
The stock is rising after breaking the resistance at 38.70 levels. The momentum indicator is moving above the reading of 100. That confirms the bullishness in the stock. So, it would be wise to hold a long position at this point in time.
To mimic a long position, we are planning to invest in a call option. One of the preconditions for investing is the option contract should be active until January 16. Further, the stock of Cisco should be trading near $40 in the NASDAQ.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.