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By: Brendan Gilmartin, VP Research & Content

Summary

Cisco Systems (NASDAQ:CSCO) is slated to report 3Q 2013 earnings after the close of trading on Wednesday, May 15. The results are typically available at 4:05 p.m. EST and will follow with a conference call at 4:30 p.m. Given its size and influence, Cisco has the potential to impact the broader market gauges, including the index futures and large-scale ETFs.

Outliers & Strategy

  • Cisco typically provides a value for non-GAAP earnings per share that is comparable to consensus views. In the previous conference call, Cisco said Non-GAAP EPS is expected to range from $0.48 to $0.50 per share. The current consensus is $0.49 (Source: Yahoo Finance).
  • Revenues are the next most important measure for Cisco. Cisco previously said it expects 3Q 2013 revenues to increase 4.0% to 6.0% year over year. Based on the 3Q 2013 revenue figure of $11.588 bln, the projected range would equate to $12.052 bln to $12.283 bln. The consensus is $12.18 bln.
  • Note that Cisco typically provides upcoming quarterly guidance in the ensuing conference call following the earnings release. CEO John Chambers tends to be conservative in his outlook, resulting in a share price reversal. For the 4Q 2013 period, estimates are for Non-GAAP EPS of $0.51 on revenue of $12.49 bln.
  • Sympathy Plays: Juniper Networks (NYSE:JNPR), F5 Networks (NASDAQ:FFIV), Riverbed (NASDAQ:RVBD), Radvision (NASDAQ:RVSN) and Cavium (NASDAQ:CAVM).
  • Cisco shares tend to be quite active on earnings. The options market is currently pricing in a 5.6% reaction to the 3Q results.

Recent News

  • 05/13: FBR Capital upgraded Cisco Systems from Underperform to Market Perform and raised the price target from $17.00 to $19.00, according to a post on Barron's, based in part on reduced competition from software-defined networking (SDN) groups. The firm notes that valuation is reasonable, while Cisco also sports an attractive dividend yield.
  • 05/13: According to a report on StreetInsider.com, Lazard is recommending investors stay on the sidelines ahead of 3Q earnings. The firm noted that Cisco faces macroeconomic pressure in its core markets and the potential for a reduced outlook. However, the firm believes current valuation and the dividend yield could limit any downside.
  • 03/28: Cisco declared a quarterly dividend of $0.17 per share, up from the previous amount of $0.14.

Technical Review

Cisco shares are advancing ahead of the 3Q 2013 earnings release, climbing to within earshot of the 52-week high of $21.98 established on March 11. Should earnings surprise to the upside, there is long-term resistance in the $23.00/$24.00 area. Given the rising expectations headed into the earnings release, the shares are vulnerable to even the slightest misstep. In the event of a disappointment, there is initial support at the 50-Day SMA near $21.00, followed by $20.25/$20.50, with further downside risk to $20.00. (Chart courtesy of StockCharts.com)

Summary

Cisco shares are climbing back toward the recent 52-week high, benefiting from an improving macroeconomic backdrop, a pickup in enterprise spending, new product offerings and growth in mobile. At 12.1x trailing earnings, a discount to the 5-year average (16.0x), with a dividend yield of 3.22%, downside appears limited at these levels. Note that, while earnings and revenues for the 3Q period are expected to garner close scrutiny, the outlook for the 4Q period, expected during the ensuing conference call, could heavily influence the market reaction.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.