Last night CSCO reported their fiscal Q3 qtr that came in a bit better then the fairly low expectations with forward guidance that was above the prior midpoint, the stock is trading up 7.5% in the pre-market. In our quarterly preview from Tuesday we concluded:
Heading into the quarter expectations are anything but high, with analysts expecting earnings to decline 6% year over year, with sales down about 7% yoy, and most analysts do not expect much more than inline quarter and guidance.
Given the strength of late of many of CSCO’s large cap tech peers, despite reporting poor results (ORCL back in March, INTC & IBM in April) I am hard pressed to see too many scenarios where CSCO would test support down near the March lows just above $21.
Back in late March we traded CSCO from the long side (Network Lag), suggesting that CSCO’s cheap valuation, strong balance sheet, commitment to cash return and laggard status could play catch up to some of its large cap peers. Prior to last night’s results, we did not have a ton of conviction either way but on Fast Money Tuesday I highlighted the fact that the implied move in the options market at only about 4% seemed cheap and that if the company beat and raised, which they did, the stock would be up more than the implied move:
So without looking to make a call prior to the results, what to do now? Just to be clear, while earnings were better than expected they had the usual benefits of financial engineering, and sales declined year over year for the second consecutive quarter, and the company is on track to have its first annual sales decline, and only its second since the internet bubble burst . The company still has its hands full warding off market share pressure from smaller competitors, in a pretty sluggish global recovery. I guess the big takeaway was CEO John Chambers’ fairly hesitant comments about Europe being less bad (read here from Business Insider).
Given the rotation into large cap tech stocks, and CSCO’s lack of participation as I highlighted in the video, the stock is obviously in catch up mode, and while a $25 print is clearly in the cards, I am not sure I would chase up here. The chart below shows CSCO’s under-performance vs INTC, MSFT & ORCL over the last year:
I suspect the stock will be bought on pullbacks. Just as I was not willing to stick my neck out just prior to the print, I am not willing to chase it here. I might be a buyer near $24, though let’s see how it acts today as a failure could signal the safety rotation trade is running long in the tooth.