Full 360-Degree Earnings Preview for Cisco Systems (CSCO)

Cisco Systems, Inc. (NASDAQ: CSCO) is due to report today after the closing bell.  The big issues that the company is fighting besides weaker sales are ongoing restructuring efforts, the tone of John Chambers in his apologetic comments, and that the past quarters have expectations very low for the networking giant.  We also want to note that we do expect layoffs to be confirmed today as part of Cisco’s restructuring efforts. 

The estimates appear to have the expectation bar set very low.  If Cisco can hold its own today, it may be the first of our future mega-cap stocks to reach that $100 billion market cap.  Thomson Reuters has estimates of $0.37 EPS and $10.86 billion in revenues.  The earnings expectation is actually now lower than last year’s same quarter and the revenue growth assumption is less than 5% on a year over year basis.  Next quarter estimates are $0.42 EPS and $11.67 billion in revenues.

Cisco stock is currently around $17.80 today and its 52-week range is $16.52 to $26.80.  It would be logical that trading will be choppy to very choppy between now and the closing bell as we go into earnings.  Thomson Reuters lists a mean consensus price target expected by analysts of only about $22.44 and that has been in steady decline.

Wall Street is fickle enough that John Chambers is now going to have fight for his CEO life if the company is much more pessimistic than peers all over again for the coming year.  It has been Chambers that grew into all of these businesses by acquiring them and the company’s new data center effort is the effort that may have disrupted the company the most.  Cisco has already started gearing down its retail efforts, via the dumping of Flip…

By our take, options traders are only pricing in a move of up to about 3.5% in either direction, or maybe as much as 4% tops.  With shares having already sold off so much, it is easy to see why the option volume is so strong.  At mid-day we saw tha the most active May-2011 option contract was the $17 PUT at $0.20 with over 41,000 contracts traded and an open interest of about 112,000 contracts.  The largest contracts in the May-2011 open interest is actually on the CALL side: over 192,000 of the $18 CALL, over 155,000 of the $19 CALL, and over 210,000 of the $20 CALL.

A chart review of Cisco from stockcharts.com does actually offer some keen insight.  Despite having been slaughtered, Cisco shares have actually been drifting higher and higher since the 52-week low was put in during mid-April.  Shares have even been above the 50-day moving average (listed as $17.46 on Wednesday) for four or five trading sessions.  We consider the 200-day moving average irrelevant at the moment.  That 200-day moving average is all the way up at $20.24. That level acted as a peak for the stock back in February before earnings.

We have tried to look at some straight-line resistance levels and believe that there are many resistance points.  The resistance points to consider on our take are as follows (plus or minus 5 cents):

• First resistance at $18.00 to $18.05;
• Second resistance of $18.30;
• Third resistance of $18.55;
• Fourth resistance gets much more firm at $19.00;
• Fifth and extreme resistance looks to be at $19.45 to $19.45.

Several issues are coming into play here besides just the restructuring and the hugely negative precedent.  Margin compression, a likely formal layoff confirmation today, charge-offs due to winding down and realignment of operations, currency fluctuations, and a large cash position being locked up overseas (hopefully) awaiting a U.S.-repatriation credit or allowance.

That is your full preview of Cisco earnings.  Stay tuned.  This one could be extremely volatile as we have seen of late.  Lastly, we believe that Cisco’s restructuring announcements are not finished even after today.

JON C. OGG