Citrix Systems (CTXS) is scheduled to report fourth quarter earnings results after the closing bell on Wednesday. Analysts expect the company to earn $1.59 per share on revenue of $791.95 million. Based on the fundamental indicators, the technical pattern, and the sentiment indicators, I look for the stock to continue trending higher after the earnings report.
Let’s look at the fundamentals first. Citrix has seen its earnings grow at a rate of 9% annually over the last three years and they grew by 15% in the third quarter. Analysts expect the 2018 earnings to grow by 15%.
Sales have actually declined at a rate of 4% per year over the last three years, but they grew by 6% in the third quarter and analysts expect sales to grow by 4.9% for 2018 as a whole.
In addition to the recent earnings and sales growth, the company shows strong management efficiency and profitability measures. The company’s return on equity is 41.3% and its return on assets is 8.6%. The profit margin is at 32% and the operating margin is at 25.4%.
The company raised its 2018 guidance when it reported third quarter results and one of the drivers behind the raised guidance is the growth in subscription-based services. The company saw revenues from subscriptions jump 37.1% in the third quarter compared to the previous year.
Upwardly-Sloped Trend Channel Appears To Be Guiding The Stock Higher
In addition to the solid fundamentals, the stock has been trending higher over the last three years and the stock has been able to maintain that trend even through the recent market turmoil. A trend channel has formed that seems to be guiding the stock higher.
You can see that the upper rail is formed by the highs from late 2015 and last summer. The parallel lower rail is formed from the lows in early 2016 and in the third quarter of 2017. The recent market pullback that has caused many stocks to break their upward momentum did bring Citrix down to its 52-week moving average, but it didn’t make it down to the lower rail.
The stock was in overbought territory for a good part of the first half of the year, but the recent dip brought the indicators down and they are now in the middle of the range. The weekly stochastics did reach oversold territory in October and that is only the third time this has happened in the last four years.
Another possible bullish sign for the stock is the double-bottom pattern formed by the lows in October and December. For the pattern to be confirmed the stock would need to move above the peak price between the two lows which was $111.91.
Lots Of Skepticism Toward The Stock Ahead Of Earnings
Despite the solid fundamental performance from the company and the strong price performance from the stock, analysts and investors appear to be pretty skeptical of the stock. Of the 22 analysts following Citrix, only nine rank the stock as a “buy.” There are 10 “hold” ratings and three “sell” ratings. Looking at the percentage of buy ratings, only 41% have the stock rated as a buy. When I see a stock that has performed as well as Citrix, the buy percentage is usually in the 70% range.
The short interest ratio is also indicating that investors are somewhat pessimistic toward the stock. The ratio is currently at 5.66 with 11.25 million shares sold short as of December 31. The number of shares sold short jumped by 1.65 million shares in the second half of December and that is indicative of growing pessimism. It is also good news for investors as the short sellers can help drive the stock higher by adding buying pressure as the stock climbs.
The put/call ratio currently stands at 1.17 and that is also indicative of bearish sentiment toward the stock. A normal put/call ratio would fall in the 0.75 range for a stock that has performed as well as Citrix, seeing above one was surprising.
All three of these sentiment indicators are showing signs of pessimism toward Citrix and from a contrarian perspective, this is a good thing. If everyone is bullish on a stock, there are very few buyers left to drive the price higher - even on good news. When you see a stock like Citrix and the pessimism from all angles, it has plenty of potential buying pressure to drive the stock higher as the bears convert to bulls.
My Overall Take On Citrix Systems
If you haven’t figured it out yet, I am pretty bullish on Citrix Systems. The complete picture is that you have a company that has been able to grow its earnings and sales in recent quarters. The management efficiency indicators are well above average and so are the profitability measures.
The stock has been trending higher and has performed far better than most tech stocks during the recent selloff. The methodical manner in which the stock has been climbing within the trend channel is a benefit as well.
The icing on the cake is the bearish sentiment toward the stock. This potential buying pressure adds to the bullish picture if the stock continues to climb.
When Citrix was dancing around its 52-week moving average in the third quarter of 2017, the stock was trading around $75 a share. Over the next ten months, the stock jumped over 50%.
I look for Citrix to make another big gain in the coming quarters, but I don’t know if the overall market conditions are going to be as conducive as they were in 2017. With that in mind, I can see the stock gaining between 30 to 35% over the next nine to 10 months.
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Source : https://seekingalpha.com/article/4234289-citrix-systems-earnings-preview-look-upward-trajectory-continue