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Contributors: Douglas McIntyre Jon C. Ogg

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Monday, August 07, 2006

Cisco Earnings Preview

Tomorrow after the close is the Cicso Systems (CSCO) earnings report, which is difficult to peg some anticipation since the FOMC report is tomorrow at 2:15 PM EST.

What you may not have noticed is that CSCO shares at the $17.41 close today are still only about 4% above the 52-week lows of $16.83. In the last 5-years this stock has gotten within inches of $29.00 and has traded under $10.00 in 2002. This really puts it at the lower-end of a trading range that has been in place for 3 years. This makes one wonder how bad the street is expecting the verbiage to be. It also makes you wonder if the street is anticipating that the next technology spending wave from telecoms and corporations is dead from top to bottom.

Cisco in the last few years has transformed itself from a router-driven company into a company that provides almost every aspect of networking needs for telecoms, cable operators, and corporations. It now is also in many wireless and security initiatives, it has set-top box operations from Scientific Atlanta, and even has a large portion of the home and small business networking market through its Linksys unit.

Because of all of the management gaps inside Juniper (JNPR) and because of internal issues, they have essentially stopped stealing market share from Cisco. The gains made from the 3Com/Huawei joint venture have been good for majority owner 3Com (COMS), although the look-alike routers haven't been sizably denting Cisco on a real level. Both Foundry (FDRY) and Extreme Networks (EXTR) have been relegated to a sort of unwanted step child existence where they are allowed to live and prosper, so long as they do not get in the way too often and do not take away too much of the resources. We have had a consolidating telecom operator universe, and we have noted on numerous times that this will create a telecom equipment supplier environment full of good hits and bad misses.

So what is the street expecting? All estimates may change from last minute changes: Estimates on a consensus basis appear to be $0.28 for EPS and just over $7.9 Billion in revenues. The year-over-year comparables are going to look huge because of the $6.58 Billion revenue for the July quarter in 2005, but that is because Cisco has acquired Scientific Atlanta and other operations. If the company offers any formal guidance, you can compare it to a flat EPS $0.28 estimate on slightly lower sequential revenues of $7.85+ Billion expected from the street next quarter. The consensus estimates for fiscal July 2007 is also $1.20 EPS and about $32.8+ Billion in revenues.

It is probably safe to say that Cisco will get less coverage than normal ahead of the earnings report because of the FOMC and the decision on interest rates. As of Monday's close options traders do not appear to be bracing for a stock price change of more than 2.5%, but that often changes in the hours before a report. It is also hard to guage that number as a fixed number because of the fact that at 2:15 PM EST and the minutes after the Fed decision you may very well see a rapid whip-saw trading pattern in the market. We may see some last minute earnings and revenue projections Tuesday, which is normal for such a large earnings report.

Jon C. Ogg
August 7, 2006

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