Cisco Systems (CSCO) will release its fourth-quarter earnings report after the close of trading Wednesday night. And once again, the question for CSCO investors (current or would-be) is, “How to trade the stock ahead of earnings?”
While Cisco’s product and services mix remains in the midst of a transition toward the cloud, the company still should benefit from the ongoing upgrade cycle in the broadband and telecom industries.
That said, CSCO is still operating in a tough market, and investors should expect a year-over-year decline in revenue once again.
Cisco Earnings Expectations
Diving into the numbers, Cisco’s revenue is expected to decline 2.2% from year-ago levels to $12.14 billion, with earnings seen arriving at 53 cents per share. The analyst community, meanwhile, might be expecting higher Cisco earnings, with EarningsWhisper.com reporting a fourth-quarter whisper number of 55 cents per share.
Looking back at the company’s performance in the earnings confessional reveals that a beat of 2 to 3 cents per share is actually in line with Cisco’s financial history. Specifically, according to Zacks data, Cisco has bested the consensus estimate in every quarterly report for the past five years. So, a little optimism here is to be expected.
Overall, the brokerage community has issued a total of 27 “buy” ratings, compared to 12 “holds,” and six outright “sells.” There is room for improvement, however, as the 12-month consensus price target of $27 represents a premium of only about 7% to Monday’s close at $25.23.
Optimism is also present within the options community. The August and September series of options reveal a heavy call bias, with a put/call ratio arriving at 0.36. In other words, call options, or bets that CSCO will rally, nearly triple put options, or bets that CSCO will decline during the following two months.
What is somewhat odd is that when you zero in on just the August options contracts, the put/call open interest ratio rises to a reading of 0.61. Apparently there is some trepidation in regard to CSCO’s direction immediately following the company’s quarterly report. Still the consensus bias is that the post-earnings move remains to the upside for CSCO.
Click to Enlarge Technically speaking, CSCO has enjoyed a solid run higher in 2014. The stock has been bolstered by its 10-, 20- and 50-day moving averages for much of this run. Currently, CSCO is in the process of rebounding from its 50-day trendline, with support building in the $25 region. Resistance lies overhead near $26, and at $27.50 above that.
Traders looking to trade CSCO heading into tomorrow’s quarterly report should know that weekly August implieds are pricing in a potential post earnings move of about 6%. This places the upper bound near $26.73, while the lower bound lies at $23.77.
Options Trade on CSCO Stock
With evidence hinting at a rally for CSCO shares, one possible options trading idea is the Sep $25/$27 bull call spread.
At last check, this spread was offered at 70 cents, or $72 per pair of contracts. Breakeven lies at $25.72, while a maximum profit of $1.28, or $128 per pair of contracts, is possible if CSCO closes at or above $27 when September options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.