Cisco, Steady as she Goes?【Earnings Season】

Cisco Systems, Inc. $Cisco(CSCO)$, the leading maker and seller of routers, switches, software and services for networking reports Q3 FY 2022 results after market close on May 18. It is expected to post consensus estimate EPS of $0.86 (+3.6%) year-on-year. Consensus revenue is expected to be $13.33 billion, (+4.1%) from the year-ago quarter.

Fundamentality

From the analyst estimates and actual results in previous quarter, any revenue and profit growth are expected to be modest in 2022.

While there is still strong demand for CSCO networking products and services, with datacentres and upgrade to WiFi 6 compliant hardware cycle growing for the next few years, the upside is limited. This is exacerbated by current high inflation which raises cost of products and in response, enterprises and businesses scale back or spread out their CAPEX spending over longer duration. Supply chain challenges also continue to hamper CSCO ability to fully meet demand due to pandemic restriction and lockdowns, reducing manufacturing capabilities in South East Asia, Taiwan, Korea and especially China.

As the leading supplier of networking hardware that connects the internet, it estimates that 85% of the world’s web traffic travels through CSCO connections, it enjoys economies of scale and trust by governments, enterprises and service provides as well as businesses and consumers. Its competitors however are snapping on its heels and with faster to the market new products and lower price, which would undercut CSCO ability to growth her market share.

Cisco vs main competitors, share of hardware connecting Internet, 2021. Source: IDC / New Constructs 

CSCO however, do have a steady dividend yield of 3.0% and payout ratio of 53% (or returning more than half of its profit back to shareholders) and remains an attractive investment stock for value investors. With recent share price drop in tandem with broader Markets since the start of 2022, CSCO shares are now attractively undervalued to the tune of 59.3% by May 17 close.

CSCO Dividend Yield, Payout ratio and Valuation

Technicalities

Reviewing Weekly Chart of CSCO all the way back a decade to 2012, we can see price is on a long term uptrend until a double dip due to COVID-19 pandemic and triple-whammy inflation, rate hike and geopolitical crisis induced sell-off since start of 2022.

Weekly Chart CSCO

There are three narrow price zones based on support and resistance levels that the stock has traded around, $49.04 to 50.62 (orange colour) that the price is currently at, higher zone $53.91 to 55.49 (green colour) and lower zone $45.87 to 47.45 (red colour).

Price has largely being supported by 50MA and traded above 200MA but it is not a guarantee support, has it has broken below it a few times, recently during COVID-19 pandemic crash and reduce IT hardware spending post pandemic in late 2020, albeit only for few months at most.

The price is now sitting just above the 200MA again as it is poised to report earnings. There is high likelihood if earnings estimate beat and outlook is positive, price will rebound higher, but if CSCO earnings missed estimate and she provides poor forward guidance, it would trade below 200MA.

Drilling down to Daily Chart of CSCO, we could map out possible price action post-earnings.

Daily Chart CSCO

Bullish Case

If earnings beat and CSCO provides positive forward guidance, price could rise to first target $52.82 (+4.39%) to 50MA trendline. Further upside would be price reaching bottom of higher price zone (green colour) around $53.91(+6.52%).

Bearish Case

If earnings miss and CSCO provides poor forecast for business, price could fall to first target around $49.04 (-3.17%) to bottom of current price zone (orange colour). Further downside action would see price reaching top of lower price zone (red colour) around $47.45 (-6.19%).

I would look for confirmation of price direction post earnings, before initiating positions in CSCO. CSCO could be a relatively ‘boring’ but 'steady as she goes' performer, and that might just be calming music to investors’ ears, in current markets roiled by noise of high volatility and large price swings.