Cisco Likely Headed Over $35 Or Back Under $32 (CSCO)

Tonight is the Cisco Systems (NASDAQ:CSCO) much awaited earnings conference call, and this will likely set the tone for tech stocks.  Estimates from First Call are still $0.36 EPS on $9.54 Billion in revenues.

24/7 Wall St. does not believe that John Chambers will have to come out and raise his recently-raised guidance to keep Wall Street happy.  The last call was so positive that 24/7 Wall St. feels Chambers just has to come out and maintain his vigilance exhibited in the August call and not show any major margin worries.  But if he doesn’t then the ‘against’ crowd will have all the ammo they need.  When you have a stock at an inflection point like this, it’s quite rare that it stays flat and that is why we expect a large stock price swing one way or another after today.

We gave Cisco a $34 target at the start of the year for mid-year, and shares just hit that level yesterday. A weak dollar is likely to play into the equation at least somewhat today, and if not we’d expect the company to at least address that.   Is it possible to predict a stock price ahead of an event?  No way.  We aren’t even trying to.  But what is funny is that when we plug in our options trader expectations and a discounting mechanism for a synthetic straddle trade we derive a $34.95 to $35.05 upside price and roughly a $32.25 to $32.40 downside price.  Once again, these are just math based upon history and interpretation of events. 

There is a note today from Barron’s showing that the stock pressure is from Cowen & Co. initiating coverage with a Neutral rating because of growing competition and slowing demand. Just last month, Wachovia started Cisco with an "Outperform" rating back in mid-October. Of course today’s analyst call is more front and center since it is right ahead of earnings. But what is certain is that someone is right and someone is wrong.

Cisco was named as the #3 Cramer Growth Stock early in the year.
Here was yesterday’s full earnings preview with options activity active.
Cisco was one of the windows dressing stocks.
It just announced its $16 Billion China expansion.

Of course there is no way to know ahead of time for sure, but the major move in after-hours in Cisco will likely come from Chambers first comments that are not part of the prepared commentary in the press release.  Cisco has already come close to its normal trading volume, and we’d expect this to lead the volume in after-hours and tomorrow.  It traded 193 million shares the day after last earnings.  The short interest as of mid-October was 43.89 million shares, but that is barely one day’s trading volume.

Jon C. Ogg
November 7, 2007