Thursday, November 08, 2007

Cisco Systems (NASDAQ:CSCO): No Joy at Ciscoville

Several firms are out commenting on Cisco Systems (NASDAQ:CSCO) after the networking giant released its quarterly results and guidance last night:

- Citigroup notes October was in-line at the top line but rounded $0.01 better (excluding favorable tax rate) in EPS. However, guidance calls for an in-line January, breaking the beat and raise trend. This alone would likely have the shares trading down on the news. When
coupled with a weak US Enterprise (down ~4% Y/Y) and incremental macro hedging commentary, the stock could retreat to the $25-$27 range.

Cisco's US Enterprise comments, and particularly those related to Financial Services, will
weigh on most of Citi's coverage group. In data networking, those more exposed include Riverbed and F5, while Juniper and Foundry are less exposed. In Data Storage, all are over-exposed relative to data networking including Network Appliance, EMC, Emulex,
QLogic, and Brocade.

- CIBC is somewhat more optimistic noting in line + soft U.S. = weakness in stock. However, LT fundamentals look solid and unchanged. They would buy on the weakness but don't expect upside near term.

General points of concern were: 1) weakness in switching (U.S. enterprise + product intro cycle); 2) lowest headcount additions since 2005; 3) implied slow growth in YoY order growth for international service provider; and 4) lack of growth in WLAN and Home Networking.

Stock likely to get hit but trading at 17x CIBC's '09E EPS (pre-hit) they continue to see upside. In the weak markets of 2001-2003, the stock traded above 20x. With a more diversified business today and strong growth outlook, they continue to favor the shares. Maintains SO rating and $35 target.

- Morgan Stanley thinks risk-reward favors owning shares of CSCO and they recommend using an expected sell-off as an opportunity to build a position. While not discounting macro concerns, particularly around US enterprise, Cisco is positioned to benefit from the breadth of long-tailed trends positively affecting carrier, consumer, and yes, even enterprise networks in both developed and emerging markets. Firm reiterates their OW-V rating and $38 price target while recognizing that the key risk is whether softness in US enterprise, one of the few areas of weakness this quarter, spills over into other businesses.

- Goldman Sachs is the most positive of the bunch saying CSCO shares are trading at 17x their CY08 EPS and at a 6.5% annualized cash flow yield based on the $3.1 billion in cash flow in the quarter. Firm believes Cisco can achieve at least the high end of its 13-16% top-line growth in FY08, even in the face of a weaker US enterprise (13% of sales) business outlook. Also, during the quarter, Cisco increased projections for European growth and indication that the weak US demand is currently limited to the US financials, retail, and auto verticals.

GSCO is maintaining their 12-month price target of $40.

Notablecalls: So looks like RBC was right with their comments a week back regarding the expected lumpiness in CSCO's performance. Despite all the supportive analyst ga-ga, it's difficult to be positive on CSCO here. Financials and autos represent a mere 14-15% of the co's revs, but weakness there may spread to other parts of the business.

While the stock is up roughly a buck from its pre-market lows, I suspect it may continue its slide over the next weeks. Around $29 is the level where I'd be looking for a bounce.

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