What The Buy Side Expects From Cisco

Cisco Systems (CSCO) is set to report FQ2 2014 earnings after the market closes on Wednesday, February 12th. Cisco is the world’s largest supplier of networking equipment. The company is currently going through a transition where it will refocus on areas of growth including data center hardware, security software, and mobile products. As a result of the transition analysts are expecting both EPS and revenue to be down compared to the same time last year. One cost associated with the transition was the $2.7 billion dollar acquisition of security software firm Sourcefire. Recent revelations of NSA spying may also cut into Cisco’s export sales as foreign firms worry about NSA spying through backdoors in the company’s products. The transformation that Cisco is undergoing will take time and may be painful but management believes the strategic shift will be worthwhile. Here’s how investors expect Cisco to report this quarter.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.

The current Wall Street consensus expectation is for CSCO to report 46c EPS and $11.119B revenue while the current Estimize.com consensus from 36 Buy Side and Independent contributing analysts is also 46c EPS and $11.198B revenue. This quarter the buy-side as represented by the Estimize.com community is expecting CSCO to report in-line with Wall Street on EPS but exceed on revenue.

Throughout the previous 6 quarters the consensus from Estimize.com has been more accurate than Wall Street in forecasting CSCO profit everytime and has been more accurate in predicting revenue twice. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non professional investors Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market’s actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing no difference in EPS consensuses and a larger differential than usual on revenue.

This quarter analysts are expecting profit and revenue to be down compared to FQ2 2013. The distribution of estimates published by analysts on the Estimize.com platform range from 41c to 51c EPS and $10.970B to $11.800B in revenues. This quarter we’re seeing a slightly wider distribution of estimates for CSCO compared to recent quarters.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signaling less agreement in the market, which could mean greater volatility post earnings.

Throughout the quarter the EPS consensus from Wall Street fell from 52c to 46c while the Estimize EPS consensus both started and ended the quarter at 46c. Over the same time period Wall Street lowered its revenue expectation from $12.642B to $11.119B while the Estimize forecast also decreased from $11.381B to $11.198B. Timeliness is correlated with accuracy and downward analyst revisions going into a report are often a bearish indicator.

The analyst with the highest estimate confidence rating this quarter is beckyhiu who projects 47c EPS and $11.130B in revenue. In the Winter 2014 season beckyhiu rated as the 260th best analyst and is ranked 258th overall among over 3,800 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case beckyhiu is expecting CSCO to beat the Street on profit and revenue, but report less revenue than the Estimize community is calling for.

While Cisco is going through a tranisiton, contributing analysts on the Estimize.com platform still expect the company to beat the Street’s projection on revenue and report in-line on EPS. Things may be slow for Cisco for awhile but the company is hoping to emerge from the shift to data center hardware, security software, and mobile products in a better position than it found itself in previously.

Get access to estimates for CSCO published by your Buy Side and Independent analyst peers and follow the rest of earnings season by heading over to Estimize.com. Register for free to create your own estimates and see how you stack up to Wall Street.