Cisco Systems Earnings Playbook: Make Or Break Quarter (CSCO)

After the close of trading we’ll get to see earnings out of Cisco Systems, Inc. (NYSE: CSCO). The estimates from First Call for the networking giant are $0.38 EPS on $9.79 billion in revenues.  Estimates for the coming quarter are $0.39 EPS and $10.2 billion in revenues, and estimates for fiscal July 2008 are $1.59 EPS on $40.34 billion in revenues.

If options traders were using current prices we would think that traders are only pricing in a move of $0.57 to $0.69 in either direction. We would caution that with high volatility and with earnings today this just seems far off and doesn’t seem like enough of a potential move based on a past post-earnings move and based on its performance since last earnings.  The chart on this one has been a steady ladder down since last earnings.  About the only good news that could be said is that the chart has used $22.30 as intraday support twice during the selling peak and its low closes are around today’s prices before the slight gains.  Analysts still have an average price target north of $34.00, which is now almost 50% higher than today’s prices after the huge sell-off from last quarter. 

Today is going to all be about guidance and Chambers’ stance on how he sees enterprise spending in 2008.  We already know that financial service companies are not going to have grown, although last quarter Wall Street was somehow surprised that financial firms weren’t adding routers and networking equipment while they were laying people and trying to stay afloat until a government sponsored recovery package would give them a future.  But much interest will be given to how Chambers sees international spending from both Europe and from the key emerging markets in the BRIC countries.

• Here were Chambers’ comments from the last quarterly conference call.

We expect much discussion to continue around Telepresence and for the Web 2.0 build-out opportunities. But traders have so far been using every opportunity to sell shares lower.  We feel shares have been oversold considerably, but what we think isn’t the issue.  Traders are still reacting to most "new news" merely on the headlines and they are not pricing in anything that would support efficient market theory.  If Chambers comes out very strong and the numbers ahead are not lower then we’d expect a serious relief rally.  But if Chambers comes out cautious and notes a substantial slowdown growing then we’d be in the camp that this huge sell-off already seen won’t be taken into consideration.  In our first preview we noted how this was getting down to levels where both Value Investing managers and GARP managers would have to start paying interest.  Now the question is if those prior estimates are anywhere close to reality.

Jon C. Ogg
February 6, 2008