Cisco Systems, Inc. (CSCO) will step into the earnings limelight after the close this Wednesday, and the event could be make-or-break for CSCO stock.
CSCO has shed roughly 8% since late April, giving up support at most of its key daily moving averages. Currently, the stock is battling to maintain its 200-day moving average, and a breach here at $26 could spell trouble.
Wall Street isn’t expecting much out of Cisco’s earnings report. The consensus is expecting a profit of 55 cents per share for the third quarter, up a penny from year-ago results. Revenue is seen slipping 1.4% to $11.97 billion.
That said, sentiment is leaning bullish on CSCO. For instance, EarningsWhisper.com reports that the third-quarter whisper number for Cisco earnings comes in at 57 cents per share — two cents better than the consensus. Hitting the whisper could go a long way toward reversing CSCO stock’s recent technical troubles.
Taking a broader look at sentiment in the brokerage community, data from Thomson/First Call reveals 23 buys, 14 holds, and just two sell ratings. Additionally, the 12-month price target of $29.68 represents a premium of only about 11.8% to Friday’s close.
This backdrop, while leaning bullish, leaves room for potential upgrades, if Cisco’s earnings can shake a few bears loose.
Click to Enlarge Turning 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 0.69, with calls outnumbering puts among options set to expire within the next two months. This ratio rises to a reading of 0.80, however, when we zero in on just the May options series — which expires at the end of this week.
Overall, May implieds are pricing in a potential post-earnings move for CSCO stock of about 5.5%. This places the upper bound at $27.99, while the lower bound lies at $25.07. Clearly, a breach at $26 would be bad for the stock, potentially leading to a test of the $24 region. A rally, meanwhile, still leaves CSCO short of overhead resistance at $28.
2 Trades for CSCO Stock
Call Spread: With Cisco stock trading near oversold levels heading into Wednesday’s report, and with Wall Street’s expectations set fairly low, the potential for a post-earnings rebound is quite high. Traders looking to jump on the bullish bandwagon might want to consider a June $27/$28 bull call spread.
At last check, this spread was offered at 36 cents, or $36 per pair of contracts. Breakeven lies at $27.36, while a maximum profit of 64 cents, or $64 per pair of contracts, is possible if CSCO stock closes at or above $28 when June options expire.
Puts Spread: On the other hand, those traders concerned that CSCO is headed for a breach of support near $26 might want to consider a June $25/$26 bear put spread. At last check, this spread was offered at 33 cents, or $33 per pair of contracts. Breakeven lies at $25.67, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if CSCO closes at or below $25 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
