$CSCO Q4 Earnings Preview

by Dan February 13, 2013 11:58 am • Commentary

Event: CSCO reports Q4 earnings tonight after the close.  The options market is implying about a 4.75%* move vs the 4 qtr avg move of ~6.75% and the 8 qtr avg move of ~8.4%.

* with the stock ~$21, the Feb16th 21 straddle is offered ~$1, if you bought that you would need a $1, or 4.75 move by Friday’s close to break-even.

Historical Quarertly Earnings and % Moves:

  eps est reported % move
11/13/12 .46 .47 4.81%
8/15/12 .455 .39 9.63%
5/09/12 .466 .476 -10.49%
2/08/12 .43 .44 -2.10%
4 qtr avg     6.75%
11/09/11 .39 .40 5.68%
8/10/11 .38 .39 15.95%
5/11/11 .37 .38 -4.78%
2/09/11 .35 .36 -14.16%
8 qtr avg     8.43%

data from Bloomberg


Sentiment:  Wall Street analysts are generally positive on the stock with 35 Buys, 11 Holds and 3 Sells with an avg 12 month price target of ~$23.50.  Short interest sits at only 1% of the float.

Options Volumes / Open Interest:  Open interest is heavily skewed towards calls, at around 1.6 to 1.  Option volumes over the last month have been similarly skewed towards calls, though puts and calls have traded equally in the past week.

The largest individual lines of open interest are in Feb16th expiration:  106,000 of the Feb 21 calls, 104,000 of the Feb 22 calls, and 63,5o0 of the Feb 20 puts.  

Price Action / Technicals:  CSCO has modestly out-performed the broad market, up 7% ytd, sitting 2% below the 52 week highs made last April, and capping a nearly 40% rally off of the 52 week lows made in July.  The 4 year chart below shows the stock basing right below a massive resistance level dating back to 2010.

[caption id="attachment_22651" align="aligncenter" width="589"]CSCO 4 yr chart from Bloomberg CSCO 4 yr chart from Bloomberg[/caption]


Valuation:  CSCO currently trades at 10.7x expected 2013 earnings which are only expected to grow 6% this year and 7% next.  Analyst expect sales to grow only 6% for the next 3 years.  Despite the company nearing record sales and earnings in fiscal 2013, the valuation as measured by P/E trades near 10 year and all time lows (below).

[caption id="attachment_22653" align="aligncenter" width="589"]CSCO 10 yr P/E from Bloomberg CSCO 10 yr P/E from Bloomberg[/caption]


CSCO falls into the “stuck in the mud” cheap ol’ tech category.   What they lack in organic growth opportunities,  they make up for in balance sheet (40% market cap in cash, 26% net of debt), and cash re-payment to shareholders (pays a dividend that yields 2.66% & a massive multi-billion share repurchase).

Vol Snapshot:  The chart below shows that implied vol (blue line) is lower heading into tonight’s print than in the 3 prior quarterly reports, but this is also a function of 30 day realized vol nearing 52 week lows (white line).

[caption id="attachment_22657" align="aligncenter" width="589"]CSCO 30 day IV vs 30 day Realized from Bloomberg CSCO 30 day IV vs 30 day Realized from Bloomberg[/caption]

Following earnings I would expect for IV to decline to 20 or below.


My View: CSCO has been in what feels like a perpetual restructuring for the better part of the last 10 years.  The company has used its tremendous cash flow generation to make hundreds of acquisitions both large and small in that period, none of which has ever really accelerated growth the way the bankers who pitched the deals had expected.  The company suffers the same conundrum that most of its large cap tech brethren face – the lack of organic growth and constant pricing pressure from competitors both large and small.

CSCO is obviously poised to benefit from any increases in IT spending from enterprise, carriers and governments, but this is likely to be in the low to high single digits for the foreseeable future.

What do you pay for a consistent mid single digit grower?  With the SPX at 5 year highs and the CSCO’s valuation at 10 year lows, I am hard-pressed to see investors willing to pay anywhere near a market multiple multiple for their expected $2 in earnings in fiscal 2013.

AS FOR TONIGHT’S RESULTS, THE $1 IMPLIED MOVE SEEMS FAIR. A meaningful beat and raise could easily see the stock break-out to new 52 week highs, much like the price action in YHOO since their Q4 results.  BUT given the stocks 25% rally since mid Nov, an inline qtr and squishy guidance could easily see a move back to near-term support at $20.

We are evaluating a few different trades and will be sure to post if anything strikes our fancy.