Citrix Systems (CTXS) reported fiscal first quarter earnings on July 23. The company beat estimates on both the top and bottom line. The company reported earnings of $1.53 per share and that was considerably better than the $1.23 that was estimated.
The $1.23 mark was also what the company earned in the first quarter of last year. This means the company saw earnings grow by 24.4% compared to last year.
Revenue came in at $799 million and that was better than the $772 million reported for the same period of last year. It was also higher than the consensus estimate of $768.8 million.
Despite these impressive numbers, the stock dropped almost 13% on the day earnings were released and they have continued to move lower since then. At this point the stock is down 18.2% since reporting earnings.
For me it looks like the selling is overdone at this point and it appears that the stock is finding support around the $135 area. The daily chart shows that the stock found support just below that level back in May.
There were four different days where the stock traded below $135, but it didn’t close any of those days below that price.
The stock is flirting with the $135 level again and it is in oversold territory based on the daily stochastic readings. It is also entering oversold territory based on the weekly stochastic indicators. Looking at the stochastic indicators, we see this has been a rather prolonged period below the 20 level.
The indicators dropped below 30 back in December and then rallied sharply. They did it again at the end of February and proceeded to rally. Once again in May the indicators were below the 20 level before rallying.
Fundamentals better than average
From a fundamental perspective, Citrix Systems is in better shape than the average stock. The company has seen earnings grow by 11% per year over the last three years while revenue has increased by an average of 4% per year.
The company’s return on equity is incredibly high at 109.8% and the profit margin is above average at 29.2%. Of course those figures are backwards looking, but things could get even better for the company going forward. I say this because the products Citrix offers make it easier for people to work remotely.
Yet another factor that could help Citrix rally going forward is the sentiment. There are 15 analysts covering the stock at this time with eight “buy” ratings and seven “hold” ratings. That buy percentage is lower than the average stock and that leaves room for upgrades.
The short interest ratio on the stock is higher than average at 4.22 and that is also a sign of a more pessimistic view of the stock. The average short interest ratio is in the 3.0 range.
In order to take advantage of the rally that I see happening, I suggest using the December $130 strike calls. These options don’t expire until December 18 and that gives the trade time to play out — over four months. The options are trading for $16.60 at this time with the stock trading at $137.30.
I see the stock moving up to at least $160 again by December and that would make these options worth at least $30 on an intrinsic basis. If you look at the current price and they move up to $30, we are looking at a gain of 80.7%. To reach $160, the stock will need to rally 16.5%. I like the leverage offered by this trade — almost five to one.
I would recommend closing the trade down if the stock falls below the 200-day moving average which is at $128.80 currently.
