Dow component Cisco Systems, Inc. (CSCO) reports second quarter 2021 earnings after Tuesday's closing bell, with analysts looking for a profit of $0.75 per share on $11.9 billion in revenue. If met, earnings per share (EPS) will mark a slight profit reduction compared to the same quarter in 2020. The stock lost ground in November after the networking giant met first quarter estimates on a 9.3% revenue decline, but it recovered quickly and is now trading at a 52-week high.
- Cisco Systems reports second quarter 2021 earnings after Tuesday's closing bell.
- The stock is trading at a 52-week high after key acquisitions.
- Tough resistance in the low $50s could limit short-term gains.
Merger and acquisition news dominated the recent quarter, with Cisco picking up IMIMobile PLC for approximately $730 million. The company provides "software and services that allow enterprises and organizations to stay constantly connected to their customers." Meanwhile, China's Acacia Communications, Inc. (ACIA) agreed to a merger for $115 per share after backing out of an agreement at a lower price level. The deal, which will enhance Cisco's optical capabilities, is expected to close by the end of the first quarter.
Wall Street consensus on Cisco stock has not changed in the past three months, despite the acquisitions, maintaining an "Overweight" rating based upon 11 "Buy," 1 "Overweight," and 14 "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $41 to a Street-high $60, while the stock is set to open Tuesday's session just $1 below the median $50 target. It may take a strong quarterly report to mount that midpoint, given upcoming merger challenges.
Earnings per share (EPS) are calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. It is common for a company to report EPS that is adjusted for extraordinary items and potential share dilution. The higher a company's EPS, the more profitable it is considered to be.
Cisco Long-Term Chart (1992 – 2021)
The stock split eight times in the 1990s as a proud member of that era's four tech horsemen, finally posting an all-time high at $82 in the first quarter of 2000. It fell into the single digits when the internet bubble burst, with the 2002 low at $8.12 marking the lowest low in the last 19 years. The bounce through mid-decade made limited progress, topping out in the mid-$30s in 2007 and dropping into the low teens during the 2008 economic collapse.
A successful test of the low in 2011 completed a double bottom reversal, signaling the first sustained uptrend of the new millennium. The advance stalled at 2007 resistance in the first quarter of 2017, ahead of a fourth quarter breakout that topped out just above the .618 Fibonacci selloff retracement level in the summer of 2019. The subsequent decline found support at the .382 retracement level at the end of the pandemic decline in March.
The subsequent uptick stalled two points below the pre-pandemic high in June, giving way to a pullback that posted a higher low in November. The stock just mounted the June peak, setting its sights on resistance above $50. That could mark an impenetrable barrier in the short term because it's the price level of the 2019 double top breakdown. Even so, a decline into the low $40s might then complete the right shoulder of an inverse head and shoulders breakout pattern.
An inverse head and shoulders is similar to the standard head and shoulders pattern, but inverted – with the head and shoulders top used to predict reversals in downtrends. This pattern is identified when the price action of a security meets the following characteristics: the price falls to a trough and then rises; the price falls below the former trough and then rises again; finally, the price falls again but not as far as the second trough.
The Bottom Line
Cisco heads into Tuesday's post-market earnings release fully valued and close to tough overhead supply.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.