CSCO: Fiscal Q3 Report After the Close, We Preview, Consider Ways to Play, But No Conviction, No Trade

by Dan May 9, 2012 3:08 pm • Commentary

EVENT:  CSCO reports it’s fiscal Q3 earnings tonight after the close (see Bloomberg preview/expectations at the bottom of the post).   The options market is implying a little less than a 6% move following earnings which is shy to it’s 4 qtr average move of about 7% and well below the 8tr average move of about 9%.  I think it is important to note, that when you strip out the almost 16% move higher following the company’s fiscal Q4 report, the average over the past 4 qtrs has been much more muted.


The street remains relatively mixed on the stock with 27 Buys, 20 Holds and 2 Sells, even as the company has strung together a couple solid reports since last Augusts fiscal Q4 report that marked the bottom in the stock.

Since capping an almost 55% rally off of last Augusts lows, to make a new 52 week high in early April, the stock is down about 11% from the highs, while still up about 4% ytd, severely lagging the Nasdaq which is up 13% ytd.

The chart looks broken to me though, breaking below an important trend channel that had been in place since the Aug lows, and then breaking below key support/resitance level at 19 dating back to October.  Barring a miss or a significant guidance reduction, I would expect for 18 to serve as decent support.

1 YR CSCO chart from Bloomberg


CSCO implied vol across all months has been running up into its earnings. It generally sees this level (above 30 vol) into those events. Although where it is right now isn’t really high compared to its average implied vol over the past 2 years. Only thing sort of interesting is how low the actual vol in the stock has been lately. Quite low.

[caption id="attachment_11569" align="aligncenter" width="587" caption="CSCO 2 year IV vs HV from LiveVol Pro"][/caption]

Looking at the differences between months it’s clear that the weeklies and May regulars are jacked compared to out months. The dollar cheapness of the actual options demands this going into an event, so it’s more a matter of the dollar amount that the straddles are predicting rather than any vol level that’s important (weeklies red, May yellow):

[caption id="attachment_11570" align="aligncenter" width="499" caption="CSCO monthly vols from LiveVol Pro"][/caption]


OUR VIEW:  Aside from taking a directional view into the qtr we don’t see a ton to do.  For instance if you thought the stock could be down in line with the implied move of 6% to about 17.65, from 18.76 , their aint a ton to do with $1 strikes….for instance the May 11th weekly 18 Puts are .23……to make money you would need an out sized move.  The same holds true to the upside obviously, with the stock at 18.76 the implied move would get you to about 19.90 and I am not sure the May 11th weekly 19 calls are a great buy at .41

I will say if you are bearish on the stock and the market you could look out to May regular expiration and buy the 18/17 put spread for .20, which offers a 4 to 1 payout on about a 10% move.

Conversely if you thought the stock and the market were going to bounce, the May regular 20 calls for .16 could be a decent lotto ticket…..

We have no conviction on direction and will avoid a trade.

UNUSUAL ACTIVITY:  2 of the 3 most active options today are the May11th weekly 19 calls with 32k trading, while a like amount of the May 20 calls have changed hands.


BLOOMBERG PREVIEW Cisco 3Q: Analysts Expect In-Line Qtr, Focus on Margin

By Beth Mellor
May 9 (Bloomberg) — Cisco expected to report 3Q earnings
today ~4:05pm; Barclays, UBS, Stifel all expect in-line results.
Investors will focus on adj. gross margin, commentary on macro
environment, mkt share.

• 3Q adj. EPS est. 47c (45c-49c)
• 3Q rev. est. $11.57b ($11.47b-$11.74b)
• 3Q adj. gross margin est. 61.9% (61.5%-62.5%)
• 4Q adj. EPS est. 48c (42c-52c)
• 4Q rev. est. $12b ($11.8b-$12.3b)
• 4Q adj. gross margin est. 62% (61.4%-63.1%)
• CSCO said Feb. 8 sees 3Q adj. EPS 45c-47c, rev. growth 5%- 7%, gross margin 61.5%-62%

• Gross margin: Among top questions for investors are whether GM floor has been reached, how CSCO can improve GM in light of carrier purchasing power, more Chinese competition: RBC (sector perform)
• Macro: Outlook may include caveats associated with overseas macro environment, Wunderlich (buy) says; highlights router, service provider demand in China, India in particular
• Market share: Routing unit likely gained share vs Juniper in qtr, Stifel (buy) says; service provider share gains should help CSCO reach upper end of guidance Barclays (equal weight)