Cisco (CSCO) Fiscal Q4 Earnings Preview

by Dan August 17, 2016 12:10 pm • Trade Ideas

Event: Cisco Systems (CSCO) reports their fiscal Q4 results tonight after the close. The options market is implying about a 4% one day move tomorrow, which is a tad shy of the 4 qtr average one day move of about 5% and well below the 10 year one day average post earnings move of 6%.  With the stock at $30.50, the Aug 19th weekly 30.50 straddle (the call premium + the put premium) is offered at $1.25, if you bought that, and thus the implied earnings move, you would need a rally above $31.75, or below $29.25, or about 4% in either direction… 

Price Action / Technicals: Shares of CSCO have out-performed the broad market in 2016, up about 12%, and having just made new 9 year highs this month. All of these gains have come since the company’s better than expected Q3 outlook given in mid May.

Near term the breakout level near $29.50 could be a fairly obvious spot for a consolidation on less than inspiring earnings and/or outlook (but anywhere holding the uptrend above $28.25 probably keeps the constructive short term technical pattern in tact):

[caption id="attachment_65730" align="aligncenter" width="600"]CSCO 1yr chart from Bloomberg CSCO 1yr chart from Bloomberg[/caption]

If the stock is to hold support between $29 and $30, then it’s fairly clear looking back to 2000 that there is little overhead resistance:

[caption id="attachment_65731" align="aligncenter" width="600"]CSCO 16 year chart from Bloomberg CSCO 16 year chart from Bloomberg[/caption]

My Take Into the Print:  CSCO is a cheap stock trading 12.5x expected fiscal 2017 eps growth of 4% on 3% sales growth.  And from a balance sheet and capital return standpoint, it is considered defensive, with 41% of their market cap in cash, 23% net of debt. CSCO pays a dividend that yields nearly 3.4% and in the company is in midst of a $15 billion share repurchase program.

Potential hiccups for guidance is likely the company’s reliance on emerging markets for future growth and their more than 50% revenue exposure outside the U.S.  In the quarter just ended, the U.S. Dollar weakness might have a minimal impact, as the DXY  (US Dollar Index) is nearly in the same spot to when they last guided on May 18th.

The stock is down nearly 2% today on media reports that suggest the company is set to announce a massive workforce reduction to the tune of 14,000 jobs, or 20% of the total.  I think it is safe to say that the knee-jerk reaction of investors is not to take this sort of news as bullish, or done from a place of strength. Yes CEO Chuck Robbins has just passed the anniversary of his first year at the helm of the company and will likely given some leeway as he looks to set his own course for the company, much the way Satya Nadella has done at Microsoft in the last year.  I would add that Robbins could be getting ready to clear the decks, get some buy-in from investors on the expense side and then look to make a transformative large acquisition just the way that Nadella recently did with their $27 billion bid for LinkedIn in an effort to move into faster growing, non-commoditized businesses.

We will follow up with some options trade ideas depending on ones current positioning or directional inclination.