Full 360-Degree Earnings Preview for Cisco

After a poor IBM report and subsequent reaction and after a rival CEO departure from Juniper Networks, investors have to be wondering if Cisco’s 12% bounce from the V-bottom of $22.49 on October 15 was justified.

24/7 Wall St. has provided a 360-degree preview of what to look for in Cisco’s earnings. While we have the Thomson Reuters consensus data included in the report, we have looked at the recent options trading, the chart, competitors, analyst target prices, endless stock buybacks, declining margins and many other issues to make this a comprehensive earnings preview.

Thomson Reuters currently has consensus estimates of $0.53 in earnings per share (EPS) and $12.16 billion in revenue. This compares to the same report from a year ago of $0.53 EPS and $12.08 billion in revenue. Hint, this represents no real growth to speak of.

The estimates for the coming quarter are $0.53 EPS and revenue of $12.09 billion. That would compare to $0.47 EPS and $11.16 billion in the same quarter from a year earlier.

While everyone will be watching the report closely, 24/7 Wall St. will be looking at this report for a comparison of enterprise spending. After all, the words of John Chambers are often used as a barometer for the broader enterprise technology market. The big trick to consider is whether the IBM carnage was company specific. Needless to say, Wall Street would almost certainly be extremely disappointed if Cisco saw the same trends as IBM and did not confess ahead of the formal earnings report.

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Cisco remains a stock that the investment community considers stuck in what feels like is becoming a permanent restructuring feedback loop. If Wall Street was more positive in its bias, then investors would give Cisco a forward price-to-earnings (P/E) ratio higher than its current 11.65. With this low P/E ratio and with plenty of dividend coverage, Cisco remains the king of big technology dividends with a 3% yield.

Shares were trading flat at $25.15 mid-Wednesday ahead of the report. The Thomson Reuters consensus analyst price target was $26.50, but the street’s highest analyst price target is still up at $33. Cisco’s 52-week trading range is $20.22 to $26.08.

Cisco’s endless buybacks should keep investors interested as well. The company returned $13.3 billion in dividend and buyback payments over its latest fiscal year ending last quarter. Cisco’s lifetime stock buyback plan had retired 4.3 billion common shares as of the last quarter (at an average price of $20.63 per share, totaling $88.4 billion spent since it started). Cisco’s remaining authorized dollar amount for current and future stock repurchases was roughly $8.6 billion at the end of the last quarter.

Our current concern remains on Cisco’s declining gross margin. Our take was that Cisco may be able only to delay a slowdown of its margins rather than completely stop the dropping margins.

Cisco’s cash and cash equivalents were $52.1 billion at the end of its most recent quarter. For a comparison to buybacks and cash balances, Cisco’s current market cap is roughly $128 billion.

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Cisco’s chart has shown mixed signals of late. Its stock broke under the 200-day moving average in October’s selling panic, with a low of almost $22.50. Back above $25 now, the shares have petered out in the past week around $25.30 to $25.40 — and this was resistance more than a month ago before the stock selling panic took hold. Cisco’s 50-day moving average is down at $24.45 and the 200-day moving average is much lower than that at $23.65. It would seem that both levels would act as key support if the report does not live up to expectations.

It was just back in October, right around the tech selling peak, that Deutsche Bank named Cisco as a top tech and IT stock for the rest of 2014.

Options are just not showing any significant reading one way or another ahead of the earnings report. It looks as though options traders are braced for a move of around $0.70, or almost 3%, in either direction. The call option volume on Wednesday is much more skewed to speculative call options, versus speculative put options — what usually signals a bullish bias. The flip side is that the open interest was much larger in the speculative put options than in speculative call options, generally a bearish bias.

All in all, Cisco looks like it is going to have to beat earnings and talk its story up to keep everyone happy. The options and chart analysis indicates that there is confusion, and the performance since the V-bottom in October doesn’t seemingly allow for much room for another “meet and guide in-line” quarter.

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