Wednesday, August 09, 2006

Calls of Note Part 1

Several firms are commenting on Cisco Systems (NASDAQ:CSCO) after the co released its FQ4 results and provided above consensus F2007 guidance:

* Goldman Sachs thinks Cisco's shares are undervalued, as the stock does not reflect the company's double digit sales growth potential and margin sustainability. Firm's above consensus earnings forecast reflects an acceleration in high margin routing (20% of sales) based on increased carrier demand related to video driving stronger internet traffic growth, stable high single digit switching (35% of sales) growth based on our proprietary model of the market, and continued share gains in advanced technologies (25% of sales). Thei margin forecast is also strong based on view of Cisco's barriers to competitors and price stability in switching, its largest line of business. Firm sees a 45% return from last nights close to our $25 target, based on a 19x multiple on CY2007 EPS forecast of $1.34, justified by Cisco's growth rate.

Goldman believes the following catalysts will move the Street towards their bullish view of Cisco's growth potential, positively impacting Street estimates and the multiple: 1) September 6, 2006 - investor day will likely offer investors data that supports a stable gross margin outlook and strong sales growth outlook. 2) November 8, 2006 - October quarterly results and forward guidance should support Cisco's growth outlook. 3) Aggressive share repurchase should boost earnings growth rate.

* Morgan Stanley notes large-cap tech companies hitting on nearly all cylinders are rare even in the best of times, and Cisco's ability to produce solid results and far-better-than-expected guidance in the current choppy demand environment is not to be discounted, in firm's opinion. Affirmatively answering questions about growth and profitability should make Cisco a key investment for tech investors heading into the second half of the year, and the firm reiterates their Overweight-rating and $26 price target.

Notes they were buyers of shares ahead of the quarter and they are buyers today. Results and guidance reinforce our thesis that the proliferation of network devices in the home, at the enterprise, and across service provider networks combined with increasing bandwidth demand should deliver revenue growth of 12-15% and stable operating margins for Cisco for the next several years.

Reits Overweight.

* UBS believes CSCO's backlog of ~$3B helped company provide guidance of 11%-13% y/y for Oct qtr. This may be viewed as a slight short term positive as CSCO has narrowed its guidance range for a seasonally challenging October quarter from the long term range of 10%-15% y/y.

While CSCO has solid near term visibility given higher backlog, they still believe organic revenue growth will be 12% y/y in F07 vs. 11% in 06. Firm doesn't see the macro environment supporting a much higher organic growth in 07 over 06.

Firm values CSCO at 18x CY07 option adjusted EPS est. of $1.20 ($1.14 prev). They believe CSCO will continue to trade at 18x-20x range if organic rev growth is in the 10-15% range w/ stable margins. In order for CSCO to trade >20x multiple, the organic rev growth will likely have to exceed 15% w/ stable margins.

Maintains Neutral and $21 tgt.

Notablecalls: Nice results from CSCO. While the switching biz was bit softer than expected the overall picture looks to be positive. Other than that, I have to side with UBS here. Think CSCO can go as high as $19.50 or even $20 in the coming days but that's about it. Color me bearish for 2007.

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