What Will Cisco Do After This Earnings Release?

With shares of Cisco (NASDAQ:CSCO) trading around $24, is CSCO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Cisco designs, manufactures, and sells Internet protocol-based networking and other products related to communications and and provides services associated with these products and their use to information technology industries worldwide. The company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. Cisco operates in five segments: United States and Canada, European markets, emerging markets, Asia Pacific, and Japan.

On Thursday, Cisco shares fell in premarket trading after the company announced it was cutting 4,000 jobs, about 5 percent of its workforce, despite making a profit in its fiscal fourth quarter. The company said the slow economic recovery is hindering growth, especially in Asia. Revenue grew 6 percent in the fourth quarter, but the world’s largest maker of network equipment predicted revenue would grow just 3 to 5 percent in the current quarter.

T = Technicals on the Stock Chart Are Strong

Cisco stock has been trending higher in the past several months. The stock is currently trading near the top end of a range that extends back several years. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Cisco is trading above its rising key averages which signal neutral to bullish price action in the near term.

CSCO

Source: Thinkorswim

Taking a look at the implied volatility and implied volatility skew levels of Cisco options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Cisco Options

35.23%

83%

81%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of Thursday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Cisco’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Cisco look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

17.48%

15.00%

47.50%

18.18%

Revenue Growth (Y-O-Y)

6.22%

5.42%

4.95%

5.51%

Earnings Reaction

-7.17%

12.63%

-0.70%

4.80%

Cisco has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Cisco’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Cisco stock done relative to its peers – HP (NYSE:HPQ), Alcatel-Lucent (NYSE:ALU), Juniper Networks (NYSE:JNPR) — and sector?

Cisco

HP

Alcatel-Lucent

Juniper Networks

Sector

Year-to-Date Return

24.28%

82.25%

92.09%

3.20%

29.48%

Cisco has been an average relative performer, year to date.

Conclusion

Cisco is a provider of  networking solutions to companies and consumers worldwide. The company recently released news that did not please investors. The stock has been trending higher in recent months and is now trading near the top end of a range. Over the past four quarters, earnings and revenue figures have been increasing. However, investors in the company have had mixed feelings about recent earnings announcements. Relative to its peers and sector, Cisco has been an average year-to-date performer. WAIT AND SEE what Cisco does this coming quarter.

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