Cisco to report earnings; Options Straddle takes Advantage

Network equipment giant Cisco Systems (CSCO) will report its October-quarter earnings after the close on Wednesday. Earnings per share is estimated at 84 cents on revenue of $13.31 billion.
With the options market currently only moving 4.9% on the event, investors may consider a long straddle to take advantage of a larger move (either higher or lower) than expected on Cisco stock.

Straddle is an options strategy where an investor does not have any idea about the up or down direction of the stocks at the time of inception. Instead, the trader believes that the stock will move more in either direction than the market.

With Cisco shares trading near 46 per share on Friday, investors may consider placing a straddle by buying 46 calls and 46 puts at the end of November 25. This trade can be placed for a debit of $2.75, which corresponds to a maximum loss of $275 if the shares trade at $46 at expiration.

An investor will make a profit if Cisco trades above 48.75 or below 43.25 at expiration. The maximum profit on this trade is theoretically unlimited.

Cisco alternatives appear cheaper than earlier moves

Cisco stock’s vested earnings appear to be down 4.9%, compared to an average move of 5.8% for the company. Furthermore, recent earnings results have produced even more volatile moves. Shares rose 13.7% on May 19 following the fiscal Q3 announcement, followed by a 5.8% increase with the most recent report on August 18.

Normally, to trade an earnings event investors would trade options expiring after the event, in this case the November 18 expiration. Nevertheless, in this case the November 25 option looks more attractive as the forward volatility (between the two expirations) is only 22%. This gives investors more time to trade without paying that much in option premiums.

Any volatility in the shares could come from an update in the guidance. Last quarter Cisco released its 2023 sales growth to come in between 4%-6%. In contrast, with the company already issuing 2023 guidance, the lower vesting move may be justified, especially if there aren’t any big surprises.

Cisco stock currently has an IBD overall rating of 74. The stock is down 27% year-over-year, although it is now trading above its 50-day moving average but below the 200-day line.

Cisco Systems (CSCO) is expected to deliver a year-over-year increase in earnings on higher revenues when it reports results for the quarter ended October 2022. This widely-known consensus outlook gives a good sense of the company’s earnings picture, but how the actual results compare to these estimates is a powerful factor that could impact its near-term stock price.

The earnings report, which is expected to be released on November 16, 2022, might help the stock move higher if these key numbers are better than expectations. On the other hand, if they miss, the stock may move lower.

While management’s discussion of business conditions on the earnings call will mostly determine the sustainability of the immediate price change and future earnings expectations, it’s worth having a handicapping insight into the odds of a positive EPS surprise.

Zacks Consensus Estimate

This seller of routers, switches, software and services is expected to post quarterly earnings of $0.84 per share in its upcoming report, which represents a year-over-year change of +2.4%.

Revenues are expected to be $13.32 billion, up 3.3% from the year-ago quarter.

Estimate Revisions Trend

The consensus EPS estimate for the quarter has remained unchanged over the last 30 days. This is essentially a reflection of how the covering analysts have collectively reassessed their initial estimates over this period.

Investors should keep in mind that an aggregate change may not always reflect the direction of estimate revisions by each of the covering analysts.

Earnings Whisper

Estimate revisions ahead of a company’s earnings release offer clues to the business conditions for the period whose results are coming out. This insight is at the core of our proprietary surprise prediction model — the Zacks Earnings ESP (Expected Surprise Prediction).

The Zacks Earnings ESP compares the Most Accurate Estimate to the Zacks Consensus Estimate for the quarter; the Most Accurate Estimate is a more recent version of the Zacks Consensus EPS estimate. The idea here is that analysts revising their estimates right before an earnings release have the latest information, which could potentially be more accurate than what they and others contributing to the consensus had predicted earlier.

Thus, a positive or negative Earnings ESP reading theoretically indicates the likely deviation of the actual earnings from the consensus estimate. However, the model’s predictive power is significant for positive ESP readings only.

A positive Earnings ESP is a strong predictor of an earnings beat, particularly when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that stocks with this combination produce a positive surprise nearly 70% of the time, and a solid Zacks Rank actually increases the predictive power of Earnings ESP.

Please note that a negative Earnings ESP reading is not indicative of an earnings miss. Our research shows that it is difficult to predict an earnings beat with any degree of confidence for stocks with negative Earnings ESP readings and/or Zacks Rank of 4 (Sell) or 5 (Strong Sell).

How Have the Numbers Shaped Up for Cisco?

For Cisco, the Most Accurate Estimate is higher than the Zacks Consensus Estimate, suggesting that analysts have recently become bullish on the company’s earnings prospects. This has resulted in an Earnings ESP of +1.46%.