Blue-chip networking giant Cisco Systems, Inc. (NASDAQ:CSCO) joins the earnings parade after the close of trading tomorrow afternoon. Heading into the event, Wall Street has set its sights on earnings of 53 cents per share, with revenue seen rising 4.5% to $12.1 billion.
Driven by strong demand for its switching and routing products, Cisco has seen revenue climb steadily for the past four quarters, and stockholders will be expecting a repeat performance.
Historically, Cisco has been a strong fundamental performer, topping or matching Wall Street’s quarterly expectations in every quarter for the past four years. This strong earnings backdrop may have led some analysts to expect more from the company, as EarningsWhisper.com reports that Cisco’s third-quarter whisper number arrives 3 cents higher at 56 cents per share.
The overall mood in the brokerage community currently holds a distinct bullish slant. According to data from Thomson/First Call, 20 of the 25 analysts following CSCO stock rate the shares a “buy” or better. That said, the 12-month price target of $32 currently represents a conservative premium of only about 9.5% to yesterday’s close.
Opinions may be on the verge of shifting more bullish, however. Yesterday, Pacific Crest upgraded CSCO stock to “overweight” from “sector weight,” while Raymond James lifted its price target to $33 from $30. Should more analysts follow suit, it could provide additional leverage for CSCO traders.
Shifting our attention to the options pits, we find a fair amount of call activity for CSCO stock. Currently, the May/June put/call open interest ratio comes in at 0.65, with calls easily outnumbering puts among options set to expire within the next two months. This ratio climbs to a reading of 0.72, however, when we zero in on just the May options series, which expires at the end of this week.
Click to Enlarge Overall, May implieds are pricing in a potential post-earnings move of about 5% for CSCO stock. This places the upper bound at $30.43, while the lower bound lies at $27.57. The $30 region remains a significant technical hurdle for CSCO stock, and unless earnings are stellar, the shares will have trouble making headway in the region. Support, meanwhile, emerges in the $28 region, but a breach of this area could lead to follow-through selling.
2 Trades for CSCO Stock
Call Spread: With expectations mixed, overhead technical resistance, and potential pressures on its core businesses, CSCO is a hard call to make ahead of earnings. That said, traders looking to follow the brokerage community’s bullish lead might want to consider a Jun $29/$31 bull call spread.
At last check, this spread was offered at 76 cents, or $76 per pair of contracts. Breakeven lies at $29.76, while a maximum profit of $1.24, or $124 per pair of contracts, is possible if CSCO closes at or above $31 when June options expire.
Put Spread: On the other hand, those traders concerned that CSCO is headed for another rejection in the $30 region due to poor guidance or a lackluster quarterly report might want to consider a Jun $27/$29 bear put spread. After the close on Monday, this spread was offered at 73 cents, or $73 per pair of contracts. Breakeven lies at $28.27, while a maximum profit of $1.27, or $127 per pair of contracts, is possible if CSCO closes at or below $27 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
