Is Cisco Worth Investing In?

With shares of Cisco (NASDAQ:CSCO) trading around $21, 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 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.

Cisco shares plummeted in after-hours trading on Wednesday after the company posted third-quarter earnings and fourth-quarter guidance that came in below expectations. Cisco’s revenue rose just 1.8 percent during the third quarter — the company failed to make orders it planned on producing in emerging markets like Brazil, Mexico, India, and China. Analysts had expected growth of between 3 and 5 percent. According to The Wall Street Journal, Cisco blamed the National Security Agency scandal for its lost business in China.

T = Technicals on the Stock Chart Are Mixed

Cisco stock has made positive progress in recent quarters. However, the stock is currently pulling back from highs for the year, so it may need time to stabilize. 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 below its rising key averages, which signals neutral to bearish price action in the near-term.

CSCO

Source: Thinkorswim

Taking a look at the implied volatility (red) 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

21.63%

0%

0%

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

Put IV Skew

Call IV Skew

December Options

Steep

Average

January Options

Steep

Average

As of Thursday, there is 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 very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-5.13%

17.48%

15%

47.5%

Revenue Growth (Y-O-Y)

1.76%

6.22%

5.42%

4.95%

Earnings Reaction

-12.40%*

-7.17%

12.63%

-0.70%

Cisco has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been displeased with Cisco’s recent earnings announcements.

*As of this writing.

P = Weak Relative Performance Versus Peers and Sector

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

Cisco

HP

Alcatel-Lucent

Juniper Networks

Sector

Year-to-Date Return

6.9%

39.19%

195.7%

-3.97%

15.04%

Cisco has been a poor relative performer, year-to-date.

Conclusion

Cisco is a provider of  networking solutions to companies and consumers worldwide. The company’s shares plummeted in after-hours trading on Wednesday after the company posted third-quarter earnings and fourth-quarter guidance that came in below expectations. The stock has made some progress in recent quarters but has been pulling back lately. Over the last four quarters, earnings and revenue figures have been increasing. However, investors in the company aren’t too happy with recent earnings announcements. Relative to its peers and sector, Cisco has been a poor year-to-date performer. WAIT AND SEE what Cisco does in coming quarters.

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