Cisco ($CSCO) Fiscal Q4 Earnings Preview

by CC August 12, 2015 11:18 am • Commentary

Event: CSCO reports their fiscal Q4 results tonight after the close. The options market is implying about a 5.5% one day move which is rich to the 4 qtr avg of about 4%.  With the stock at $27.60 the Aug 14th weekly 27 straddle (call premium + put premium) is offered at $1.50, if you bought the straddle, and thus the implied move, then you would need a move above $29, or below $26 by Friday’s close to break-even.  

Price Action / Technicals:  The stock is unchanged on the year, and down about 8.5% from the 52 week highs made in early March.  The year to date chart (below) shows the stock spending most of its time in 2015 between $27 and $30. The declining 50 day moving average (purple) looks poised to cross below the rising 200 day moving average (yellow).  Some technicians call this a “death cross” if and when it happens it signals declining short term momentum and often lower prices. $27 is obviously a very important support level, while $26, the brief spike low of the year in February will be an obvious target on the downside:

[caption id="attachment_56075" align="aligncenter" width="600"]CSCO ytd chart from Bloomberg CSCO ytd chart from Bloomberg[/caption]

Sentiment:  Wall Street analysts remain positively disposed to shares of CSCO with 24 Buy ratings, 14 holds and 6 Sells with an average 12 month price target of $32.  Short interest sits at less than 1% of the float.

Volatility Snapshot:  30 day at the money implied volatility (blue below, the price of options) is near 2015 and 52 week highs as 30 day realized volatility (white below, how much the stock is moving) is just above 2015 lows.  The spread between the two is very near its widest levels over the past year, suggesting investors may be reaching for protection:

[caption id="attachment_56076" align="aligncenter" width="600"]from Bloomberg from Bloomberg[/caption]

Our View: CSCO is a relatively cheap large cap tech stock, trading 12x expected fiscal 2016 earnings growth of 5%, have a 3% dividend yield, a monster share buyback and a stellar balance sheet with 39% of their $140 billion market cap in cash (24% net of debt).   Recently long time ceo John Chambers passed the baton to Chuck Robbins, who orchestrated a massive shakeup in the C-level suite over the last few months.

The big question CSCO investors have to ask themselves is whether or not the new CEO will lower the bar for forward guidance and set up for a series of beats in what could be an increasingly challenged environment for sales to carriers, businesses and in emerging markets with a backdrop of a strong dollar (last year 40% of their sales came from outside North America).  Did management agree to have Chambers go out on a high note knowing there were headwinds ahead?  Possibly, which makes the management changes executed by Robbins look like they could provide even more cover to lower forward outlook.  If this is done in a meaningful way I suspect you see the stock at $25 in the coming days, while an inline report and inline guidance and the stock probably gets back towards $29. I would be very surprised to see a beat and raise causing the stock to re-test the prior highs.

We will offer some trade ideas prior to the close depending on ones current positioning and/or directional inclination.  Stay tuned.  

Estimates and Forecasts from Bloomberg:
4Q adj. EPS est. 56c; CSCO forecast 55c-57c
4Q rev. est. $12.66b, up 2% y/y; CSCO forecast 1%-3% growth
4Q gross margin est. 61.8%; CSCO forecast 61%-62%
1Q adj. EPS est. 56c (range 46c-59c)
1Q rev. est. $12.56b, up 3% y/y (range $12.28b-$12.84b)
1Q gross margin est. 62.0% (range 61.5%-63.1%)