On Wednesday, February 12th, Cisco (CSCO) reported results for its second quarter of 2014, slightly beating analyst estimates on both top and bottom lines, while guiding third quarter within the expectations range. Nonetheless, in Thursday trading shares took a solid step down of around 4%, to the $22/share vicinity from the $22.85/share Wednesday close price. If you were surprised by the move - you shouldn't be. More to that, I don't think you should be surprised to see shares potentially trading even lower in the next few days.
Well, the results and the conference call were anything but surprising. The company reported $11.2 billion in revenue against an $11.03 billion estimate and earnings per share of $0.47 versus the $0.46 expected by the analysts. For Q3, the company forecasts a 6-8% revenue decline and EPS of $0.47-0.49 - right along the 7.1% and $0.48 estimated by analysts.
It is clear that with the shares down 4% the next day investors had much higher expectations. Shares were only up 1.87% for the year-to-date, yet appreciated almost 4% leading into the earnings report, confirming bullish sentiment and expectations of a positive surprise.
The surprise wasn't there. There was no out-of-the-park beat. There was no better-than-expected guidance. Sheesh, we didn't even get the hint of CEO retirement that I think many would have liked to hear... Yes, the 12% boost to the dividend and $4 billion share buyback announcements were nice, but the negative 6-8% growth forecast for Q2 2014 raises far too many questions. Especially from the company that claims 3-6% long-term growth.
Cisco basically reported what it guided for - the same "outlook" that sent shares range-bound to the $21 mark after the miserable first-quarter results. Further yet, the $1.95 to $2.05 FY2014 EPS forecast mimics the earlier mid-December 2013 guidance, which called for 4% revenue decline and made the share price almost see the "teens", hitting a $20.07 low on December 13th.
So where does all of this leave us? I do not have a crystal ball and can only guess where Cisco shares will trade in the near-term as the market digests the news. Considering that the expectations just got reset back to mid-December context and with the market seemingly becoming "frothy" - I see no reason why the $20 per share support should not be retested during another one of the pullback selloffs.
I have been a long-term Cisco bull from 2011 when the initial $0.06/share quarterly dividend was announced. I have enjoyed the "ride up" to the high twenties and have been painfully burned along with the rest of investors after November's Q1 earnings report.
A few days back, I finally got to the break-even point, closing out my position at $22.80, seeing the $23 level becoming the tug-of-war between bulls and bears... but then, I couldn't restrain myself and picked up a few March weekly $22.50 puts expecting a pullback. It appears my expectations have not been far off.
I must say that I'm no longer lured in by Cisco. I think it does in fact face too many innovative threats and vast competition from smaller niche players. And the acquisition strategy of expansion seems to be outliving itself. Declining revenue and margin pressure certainly give some proof to that.
I would not go too far shorting the company stock - after all the ~3.5% dividend yield puts in some floor of support and Cisco is still well positioned to support these payouts.
In the end, I think it's best to quote John Chambers from the earnings call: "... it was the first opportunity to get the door in the foot ". I think that lapse for the most part summarizes my impression of the earnings call - whatever good the management meant, I'm afraid it turned out the other way around.