Event: CSCO reports its fiscal Q1 earnings tomorrow, Nov. 12th, after the close. The options market is implying about a 4% move, which is below both the 4 quarter and 8 quarter average move of about 6.5%.
Sentiment: Wall Street analysts are generally positive on the stock, with 29 buys, 14 holds, and 5 sells, and the average 12 month price target is only around $27. Short interest is negligible at just 1.2% of the float. CSCO has actually gained 12% year-to-date, though the stock is nearly flat since the May earnings gap higher.
Options Open Interest: Total open interest favors puts over calls by a ratio of 1.05 to 1, while the 1 month average volume has favored calls over puts by a ratio of 1.1 to 1. In other words, calls and puts have nearly equal interest.
The Nov22nd 24 put line has over 75k of open interest, the most of any short-dated maturity. On the call side, the Nov22nd 25 call line has over 50k of open interest, and the Jan15 25 call line has over 80k of open interest.
Price Action/Technicals: CSCO is actually unchanged since July 2013, in stark contrast to most large cap tech stocks in that period. However, the stock has generally been strong in 2014 after a weak second half of 2013, and is within 5% of the 3 year high of $26.49:[caption id="attachment_47933" align="alignnone" width="600"] CSCO daily chart, courtesy of Bloomberg[/caption]
A break above that level would bring the 5 year high of $27.74 from April 2010 into play.
On the downside, the $24 level is the spot to watch. That was support from June to September, and we have observed significant put buying activity focused on the Nov22nd 24 puts and the Dec20th 24 puts, as noted in Monday’s and Friday’s Notable Activity posts.
Volatility: 30 day implied volatility in CSCO has inched lower over the past 2 weeks as the stock has rallied ahead of the earnings event:[caption id="attachment_47935" align="alignnone" width="600"] 30 day implied volatility in CSCO, courtesy of Bloomberg[/caption]
The implied move of 4% is also low relative to the average 6.5% move over the past year and 2 years. Perhaps one of the reasons that implied volatility is relatively subdued ahead of the event is that the $25 level has acted as a magnet for CSCO over the past 6 months.
Our View: CSCO is one of the few remaining mega cap stocks with a cheap valuation, but for good reason. At a P/E of 14x with expected EPS growth for the next 2 years of around 5%, CSCO is hardly a steal, but is relatively cheap compared to most other large caps with that expected growth.
Investors are concerned about CSCO’s extensive international exposure as well as the general competitive environment in the networking business. The general commentary this earnings season from CSCO’s tech services and networking peers indicated demand weakness, particularly abroad, exacerbated by a stronger dollar. That backdrop could make it difficult for CSCO to provide an encouraging earnings outlook.
We will look at trades tomorrow prior to their print, but would most likely be inclined to play for weak guidance and a re-test of the Oct lows, just below $23 in the coming weeks.