CSCO Fiscal Q1 Earnings Preview

by Dan November 12, 2013 3:44 pm • Commentary

Event: CSCO reports their fiscal Q1 earnings Wednesday, November 13th after the close.  The options market is implying a one-day move of  ~6.2%* vs the 4 quarter average move of ~6.3% and the 8 quarter average move of ~6.6%.  

eps est actual % move
8/14/2013 0.51 0.52 -7.17%
5/15/2013 0.49 0.51 12.62
2/13/2012 0.48 0.51 -0.71%
11/13/2012 0.46 0.47 4.81%
4 QTR AVG 6.33%

data from Bloomberg

Sentiment:  Wall Street analysts are very positive on the stock with 31 Buys, 13 Holds and 3 Sells, but with an average 12-month price target of ~$26.70, or about 12% higher than where the stock is trading, but slightly above the 52 week high made in August.  Short interest sits at only 1% of the float.

Options Volumes / Open Interest:  Open interest is skewed towards calls, with total call open interest of about 1.3 million contracts and total put open interest at about 976k contracts. Below is a table of the 8 largest lines of open interest:

Expiraton Strike Option Quantity
Jan 25 call 133,000
Jan 24 call 90,000
Nov 24 call 85,000
Jan 20 put 81,000
Nov 23 call 73,000
Jan 22 put 64,000
Jan 29 call 63,000
Jan 26 call 57,000
aug 30 call 47,000
sept 30 call 45,000

data from Bloomberg

The fact that the third largest strike of open interest is basically at the money, and expires this Friday could be important with the stock reporting earnings so close to expiration, which could help to mute the move a bit.  That open interest could act as a magnet on a move higher in the stock on earnings. A move higher would need to be robust enough to get away from the pull of that line’s open interest. “Pinning” on expiration week tends to happen near lines with lots of option open interest because traders have stock to sell above that line and stock to buy below that line in order to manage deltas. That effect can “pin” a stock to 24 on a move higher until the options expire on Friday.

Unusual Activity:  Last Wednesday when the stock broke out above its 200 day moving average, a trader rolled some Jan calls, selling to close 20,000 of the Jan 25 calls at .27 and buying to open 40k of the Jan 24 calls for .53 when the stock was $22.90.  Also back on Oct 30th, the Jan 25 calls saw a lot of interest with 60k trading, most being bought for .25.

Vol Snapshot:   Vol is fairly un-exciting going into the event. 30 day implied had been climbing recently into the new product announcement but got hit following and is now middle of the range. Any move more than a dollar and the options look cheap from a dollar perspective:

[caption id="attachment_32493" align="aligncenter" width="575"]Screen Shot 2013-11-12 at 12.41.30 PM 1 year IV30 vs HV30 from LiveVol Pro[/caption]

Look for December vol to fall from about 25 to 20 following the event or about 20%.

Price Action / Technicals:    CSCO is up ~21% on the year, under-performing the Nasdaq up 29% ytd, but in line with the performance of the Dow Jones Industrial Avg of which it is a component.   The one year chart below shows the stock basically right in the middle of the 6 month range.  On the downside, $22 should serve as fairly healthy support, and the recent low, and on the upside, $26, the breakdown level in August should serve as very reasonable technical resistance.

[caption id="attachment_32501" align="aligncenter" width="589"]CSCO 1yr chart from Bloomberg CSCO 1yr chart from Bloomberg[/caption]


Estimates/ Guidance From Bloomberg: 

  • 1Q adj. EPS est. 51c; Aug. 14, forecast adj. EPS 50c-51c
  • 1Q rev. est. $12.35b, up 4% y/y (range $12.20b-$12.48b); forecast y/y rev. growth 3%-5%
  • 1Q gross margin est. 61.9% (range 61.3%-62.3%); forecast non-GAAP gross margin 61%-62%
  • 2Q adj. EPS est. 52c (range 49c-55c)
  • 2Q rev. est. $12.60b (range $12.37b-$12.86b)
  • 2Q gross margin est. 62% (range 61.2%-62.5%)

My View:  I am long a bullish call spread in Nov that started as a calendar, then when the short leg rolled off I sold a higher strike in Nov16th (this week expirey) to make a vertical call spread (read here).  Heading into tomorrow’s report and after the stock’s 7.5% rally since late Oct, my sense is that expectations while not high, maybe in line with what the company will be able to report for the quarter just completed and guide for the current quarter.

That being said a beat and raise above expectations, which happen to be fairly low despite last quarter’s guide down could result in a 10% move back towards the 52 week highs, while a second consecutive cut in guidance would see the stock break recent support at $22 and possibly have the stock moving back towards the May breakout level of $20.  As stated above though, with the stock in the mid point of the 6 month range, an inline quarter and guidance would likely result in the stock under-performing the implied move.

We are going to re-evaluate our position based on where the stock is tomorrow prior to the print.



* Rev. will likely be low end of 3%-5% growth range, EPS should meet consensus expectations: Raymond James
* EPS likely at low end of forecast range, says FBR (market perform); headwinds may be partially offset by strength in WiFi, SP Video, small/medium enterprises
* Expect rev., EPS in-line with ests. and gross margin at high end of forecast: Janney (neutral)

* Forecast likely “conservative” for “volatile” FY2Q, Janney says; notes CSCO is usually conservative into FY2Q and faces uncertainty in U.S. federal spending,

* CSCO may have “cautious tone” due to federal trends and checks indicating softness in FY2Q in switching, routing, set-top boxes: Barclays (overweight)
* CSCO commentary likely to be conservative though weaker qtr/forecast is likely already baked into stock: Stifel

* Key question for call is whether CSCO still targets L-T rev. growth 5%-7%: Raymond James
* Look for detail on whether networking demand is being hurt by software defined networking or if concerns are mainly related to macro/federal environment: Barclays
* Also look for update on capital allocation, appetite for more acquisitions: Barclays
* Watch comments on competitive landscape, particularly Huawei’s enterprise efforts: Raymond James