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By: Craig Bowles

Overview

Cisco Systems, Inc. (NASDAQ:CSCO) is slated to report 2Q 2014 earnings after the bell on Wednesday, February 12. The earnings release is expected at approximately 4:30 p.m. EST with a 4:30 p.m. webcast that is available through Cisco Investor Relations. The company represents the networking equipment industry on the S&P 500 Index.

Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share for 2Q 2014: The current Street estimate is $0.46, the midpoint of company guidance of $0.45 to $0.47. (Source: Yahoo! Finance). Cisco has beaten estimates an average of 2c over the last four quarters.
  • Revenues for 2Q 2014: Revenues are seen declining 8.9% y/y to $11.03 bln (range $10.88 bln to $11.15 bln).
  • Cisco's trailing P/E of 11.9 compares to a five-year average of 16.0 and industry average of 39.1. The Price/Book is 2, so the stock is relatively low priced for the technology sector.
  • Insiders have sold 3,139,480 shares the last six months but the company announced a $15 bln buyback in November.
  • Cisco is compared other networking equipment companies with quarterly results possibly impacting Alcatel Lucent (NYSE:ALU) Hewlett-Packard (NYSE:HPQ) and Juniper Networks (NYSE:JNPR).
  • Cisco shares have a 1-day average price change on earnings of 6.20%. Options are pricing in an implied move of 5.88% on earnings.

Recent News

  • 02/04: Cisco and Google (NASDAQ:GOOG) announced they have entered into a long-term patent cross-licensing agreement covering a broad range of products and technologies.
  • 01/27: JPMorgan downgraded Cisco to Underweight from Neutral with a price target of $17.00 (from $21.00) due to weakness in emerging markets and delayed spending in switches, according to a post on StreetInsider.com.
  • 01/11: Barron's had a positive story entitled "Cisco Battles Back" stating that fears of losing market share are overblown and the stock could return 20%.

Technical Review

Cisco retested 2010's high last summer but stumbled back to below the 200-day moving average which has acted as resistance in 2014 at $23.00. The main body of support is in the $17-18 area. The stock has ranged from $13-$26 since 2008. The more immediate balance area is just above the 50-day moving average's $21.50. So a positive earnings report would likely retest $23.00 and target the top of the range at $26. Conversely, a negative report breaks the $21.50 support and possibly tests December's $20 low or the larger support area below. (Chart courtesy of StockCharts.com)

(click to enlarge)

Summary

If Cisco has become a value play in the technology sector similar to Microsoft (NASDAQ:MSFT), we might expect it to trade similarly with long, multi-year periods of consolidation between sharp rises. The upcoming earnings release on Wednesday may determine if we're headed back toward the top of the range at $26.00 or closer to the middle in the $17-18 area. It's an interesting trade with the stock having found support at $21.50. The company needs to beat estimates by at least 2c and show better than expected revenue. The revenue decline is expected to ease up as the year progresses but the expected 8.8% y/y decline for this 2Q release is the immediate concern.

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Source: Earnings Preview: Cisco Q2 2014