Will Recent News Hurt Cisco Systems Stock?

With shares of Cisco Systems (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 Systems 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 Systems on Wednesday forecast a 6 to 8 percent revenue slide this quarter, roughly in line with Wall Street expectations, as the network gearmaker struggles with sluggish emerging markets like China. The outlook marks another severe decline in sales for the former high-flying tech company, which has blamed its poor run on a boycott of U.S. equipment after revelations of American spying efforts globally. Cisco’s outlook for the fiscal third-quarter ending April translates to a forecast for revenue of between $11.2 billion and $11.5 billion, versus the $11.3 billion analysts expect on average.

T = Technicals on the Stock Chart Are Weak

Cisco Systems stock has struggled to make significant progress over the last several years. The stock is currently pulling back and may need time to stabilize before heading higher. 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 Systems is trading between its rising key averages which signal neutral price action in the near-term.

CSCO

(Source: Thinkorswim)

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

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Cisco Systems options

20.20%

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

March Options

Average

Average

April Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral 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 Systems’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Cisco Systems look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-54.24%

-5.13%

17.48%

15%

Revenue Growth (Y-O-Y)

-7.77%

1.76%

6.22%

5.42%

Earnings Reaction

-4.55%*

-10.95%

-7.17%

12.63%

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

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

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

Cisco Systems

HP

Alcatel-Lucent

Juniper Networks

Sector

Year-to-Date Return

-2.76%

6.86%

-2.05%

21.00%

6.76%

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

Conclusion

Cisco is a provider of  networking solutions to companies and consumers worldwide. The company on Wednesday forecast a 6 to 8 percent revenue slide this quarter. The stock has struggled to make significant progress over the last several years and is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has left investors displeased 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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