Why Cisco’s Earnings Hold the Key to the Tech Sector (CSCO, ORCL, AAPL, HPQ, JNPR, ALU, NOK, RIMM, CTSH, IBM, INTC)

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Cisco Systems, Inc. (NASDAQ: CSCO) is set to report earnings on Wednesday after the closing bell.  While we usually cringe when analysts and media pundits say this about a single report, the truth is that Cisco’s earnings report and its guidance could act as the lynchpin for the technology sector in the days and week ahead.  So far we are seeing a “Sell in May and go away!” theme holding over the markets.

The technology sector needs for Cisco to show that the warnings of spotty spending a month ago were just contextual.  Does Apple Inc. (NASDAQ: AAPL) have much to do with Cisco?  Technically not a thing if you just use common sense.  The reality is different though.  Apple remains the tech darling of Wall Street but its shares have pulled back and have gotten down almost as low as they were before the huge earnings gap-up in the last couple of weeks.

The first two issues to address are Juniper Networks, Inc. (NYSE: JNPR) and Alcatel-Lucent, S.A. (NYSE: ALU).  Juniper turned in an earnings report that looked like it was offering a stabilization to a really bad drop, but its stock popped up and then immediately pulled back and the stock is now under where it was before earnings.  Alcatel-Lucent just gave poor results this earnings season and its stock is back under $1.50 per ADR and is floundering as it tries to find some sense of remaining relevant outside of Europe.

The real issue here is Oracle Corporation (NASDAQ: ORCL) with Cisco.  Many analysts do not compare Oracle and Cisco enough because up until lately Oracle was more of a software play.  With Sun under its belt it has datacenter exposure but even if Oracle was to jettison its physical equipment the comparison is still crucial to understand.  While Cisco is a very different part of the enterprise technology dollars to be spent, weakness in one may mean weakness in another as technology officers can push orders out further on the horizon.

Hewlett-Packard Co. (NYSE: HPQ) is now more and more of a competitor with Cisco as well, even though the company was trying to get rid of the PC unit.  By competing in the datacenter, the former partners now compete.  H-P is also an off-calendar quarterly reporting company and its shares are back down to almost $23.00 and close to a 52-week low.

There is also the old ties to Research In Motion Limited (NASDAQ: RIMM) and Nokia Corporation (NYSE: NOK), although this is more historic than present day.  Both companies remain highly challenged and we suspect that their futures will both remain challenged regardless of what Cisco says in its conference call.

Cognizant Technology Solutions Corporation (NASDAQ: CTSH) recently kept the pace of other IT-outsourcing outfits by warning about a weak IT-spending climate but it was hard to not notice that some of the more fresh weakness was noted as being in North America.  Cisco could easily be in a different bucket here, but we did see this trend as almost unified in the outsourcing segment.

Perhaps the biggest relevance is International Business Machines Corporation (NYSE: IBM).  IBM’s services backlog was slightly lower but IBM is still maintaining its long-term goals of $20.00 in earnings per share.  The stock is still within 5% of all-time highs and it has recently juiced up its dividend more than expected.

Cisco is also the last major tech report before Intel Corporation (NASDAQ: INTC) updates investors this Thursday.  It has only been about three weeks since Intel’s earnings report and we are only 24 hours or so since the chip and processor giant announced a dividend hike of its own.  Shares of Intel are now off almost $2.00 from the high of $29.27 and the consensus price target is $29.72.

Cisco shares are back under the $19.00 mark after having been at $20.00 as recently as May 1, 2012 and having been at $21.00 as recently as April 3, 2012.  The 52-week trading range is $13.30 to $21.30 and the consensus price target from Thomson Reuters is $22.58.

The Thomson Reuters estimates for Cisco are $0.47 EPS and $11.57 billion in revenue.  Cisco usually offers guidance in the conference call rather than in the press release and those estimates are $0.49 EPS and $11.99 billion in sales for the quarter ahead.  Keep in mind that Cisco trades at a mere 10.2-times its expected earnings for the fiscal year-end of July 2012.

As far as Cisco on the stock charts, this has been very weak and the 50-day moving average was up above at $19.00 and the 200-day moving average was lower around $18.13.  Both of those figures are likely to be a couple of cents different on Wednesday ahead of earnings.

A more detailed preview will appear Wednesday morning ahead of the formal Cisco earnings report showing expectations for cash, margins, options trading, stock charts, and a final revised set of earnings estimates.