Cisco Systems Earnings Preview: 2 Trades for CSCO Stock

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Networking bellwether Cisco Systems, Inc. (CSCO) is set to take the earnings stage after the close of trading tomorrow, and the situation doesn’t look promising for CSCO stock bulls.

Cisco Systems Earnings Preview: 2 Trades for CSCO StockConcerns about Chinese growth have prompted CSCO to pull back from recent highs, and fallout from China could impact Cisco’s forward-looking guidance.

Furthermore, the company is facing a slowdown in capital spending and soft seasonality in enterprise spending. While Wall Street analysts aren’t expecting a major miss, neither is anyone looking for anything surprising out of Cisco’s fiscal first-quarter earnings report.

CSCO Stock By the Numbers

For the record, Cisco earnings are expected to come in at 56 cents per share, up from 54 cents in the same quarter last year. Revenue is seen inching along at 3.3% year-over-year growth, coming in at $12.65 billion for the quarter.

Historically, Cisco has met or beat Wall Street’s estimates in every quarter for the past five years. The result is that an earnings beat is now pretty much a foregone conclusion, with the whisper number of 58 cents per share now the real surprise target.

Taking a closer look at the brokerage community, we find that cracks are starting to form in the bullish facade.

While data from Thomson/First Call reveals that 23 of the 40 analysts following CSCO stock rate the shares a “buy” or better, the last three moves by brokerage firms have been downgrades.

What’s more, the 12-month price target of $33 currently represents a premium of only about 18% to yesterday’s close. There is an argument to be made for price-target increases following a strong quarterly report, but with nothing flashy expected for Cisco earnings, downgrades to “hold” are a more likely scenario at this point.

Options activity is also turning more conservative for CSCO stock. During the past couple of weeks, the November put/call open interest ratio has risen to a perch at 0.72, with puts being added at a faster rate than calls ahead of Cisco earnings.

What’s more, the weekly Nov. 13 series ratio comes in higher, at 0.77. In other words, options traders are beginning to question CSCO’s ability to move higher following tomorrow’s quarterly report.

11-11-2015 CSCO
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Overall, weekly Nov. 13 series implieds are pricing in a potential post-earnings move of about 5% for CSCO. This places the upper bound at $29.38, while the lower bound lies at $26.62.

Technically, these expected moves fall largely in line with overhead resistance at $30 and support near $26. As a caveat to implieds, a breach of either of these support/resistance levels could certainly elicit a much-greater-than-expected move from CSCO, but it would take a surprise earnings beat or miss to drive such a reaction.

2 Trades for CSCO Stock

Put Spread: Given the stock’s current retreat, declining investor sentiment and Wall Street’s middling expectations for Cisco earnings, the path of least resistance for the shares appears to be lower. Those traders looking to bet on a continued decline for CSCO shares might want to consider a November $26.50/$27.50 bear put spread.

At last check, this spread was offered at 33 cents, or $33 per pair of contracts. Breakeven lies at $27.17, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if CSCO closes at or below $26.50 when November options expire.

Call Sell: If betting directly against CSCO stock isn’t your style, you might consider entering a weekly Nov. 13 series $30 strike call sell position. Such a trade is especially useful if you already own CSCO stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $30.

As of the close yesterday, this option was bid at eight cents, or $8 per contract. A sold call allows you keep the premium as long as CSCO stock closes below $30 at expiration.

On the downside, if CSCO rallies above $30 prior to expiration, you could be forced to provide 100 shares at CSCO’s current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/cisco-systems-earnings-preview-2-trades-csco-stock-2/.

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