Analysis: JNJ CSCO BA

The U.S. equity markets look sluggish again on Friday, continuing the action we described on Thursday in our Alerts here  and here.

Yesterday, we recommended patience into the decline because we expected some form of multi-day selloff to occur. The several factors that built into our view was an expected loss of steam after the market's rapid moved higher since January, the S&P 500 oscillator has been overbought, oil prices have lagged as expectation of future economic growth has waned, and an increased amount of trade-war uncertainty. When we combine all this together, we felt it was necessary to reinforce our discipline of patiently waiting for stocks to come in because the market had moved above our buying levels.

Today is day-two of this string of declines, so we are interested in nibbling where it makes the most sense to our discipline. Our targets are to add to a current position if it meaningfully improves our cost basis, and at the same time scour our bullpen for new opportunities. But remember, even though economic and tariff uncertainty has come back into the fold, the key differentiator that gives us confidence in buying this dip is the Fed's pivot towards a more patient approach.

Looking ahead to next week, the FDA will meet on Tuesday with the Psychopharmacologic Drugs Advisor Committee (PDAC) and the Drug Safety and Risk Management (DSaRM) Advisory Committee to evaluate the new drug application of Johnson & Johnson's (JNJ) esketamine drug. It will be a key review because one of our 2019 catalysts for J&J is this product launch which is expected to occur later this year.

As we have said before, esketamine is the drug in Johnson & Johnson 's pipeline that we are most excited for due to its potentially life-saving capabilities. It is used to combat treatment resistant depression which falls under the umbrella of major depressive disorder, a terribly debilitating disorder that hasn't had a new mechanism of action (MOA) in 30 years. As J&J explained at their September 2018 Pharma update, major depressive disorder affects 300 million people around the world, and about 1/3 of those patients fall under the treatment resistant category if they fail 2 or more lines of therapy.

Analysts at Wells Fargo think there is a "high likelihood" that the drug will be recommended for approval because of its role in treating an unmet medical need. Esketamine could be crucial for patients with suicide risk, and anything that can save lives is of most important value. Wells Fargo currently forecasts worldwide esketamine sales of $48 million in 2019, ramping up to $375 million in 2021, and $650 million in 2023. This is a development we will stay close to.

Separately, this morning, Cisco (CSCO) CEO Chuck Robbins was on CNBC's "Squawk Box" to talk about tariffs, investments in cyber-security and next-gen infrastructure, privacy, and more. The full interview can be found here.

This interview comes ahead of next Wednesday when Cisco will report its second quarter earnings for its fiscal year 2019 after the closing bell. Current consensus expectation from FactSet are for sales of $12.414 billion and adjusted earnings per share of $0.72. For reference, in the previous quarter that you can read about in our Alert here, management guided for revenues up in the rage of 5% to 7% year over year (implying $12.6 billion at midpoint) and adjusted earnings per share in the range of $0.71 to $0.73.

Fun Fact: Unlike many companies that reported already this earnings season, Cisco won't face any headwinds related to foreign exchange. The company is one of two (the other being Boeing (BA) ) that require the purchase of their products and services in the U.S. dollar.

There was an earnings preview out from Piper Jaffray this morning, and the analysts expect upside in revenue based on their channel checks as well as an earnings per share beat thanks to revenue outperformance and operating expense control. Although the upcoming print is expected to be a strong one, Piper anticipates guidance on the softer side due to several factors which include macro issues, tougher comps, a slowdown in on-premise infrastructure spending, and Service Provider exposure.

But even if sales growth normalizes after a multiple quarter period of accelerating trends, Cisco's far from frothy valuation offers a level of protection. Since our initiation, we have held the belief of how the stock is one of the cheapest names in tech. Currently, the stock trades at roughly 15x calendar year 2019 earnings and the divided yield is a solid ~2.80%. Meanwhile, the company's ongoing transformation to more software and subscription offerings should further unlock a higher multiple as it decreases the company's reliance on the more cyclical hardware sales. In the previous quarter, software subscriptions represented 57% of total software sales, an increase of 5 percentage points year over year. We don't think CSCO is down enough to justify a purchase ahead of the quarter, but long-term, we continue to believe in CEO Chuck Robbins and the company.