Wednesday, March 30, 2011

Cisco Systems (NASDAQ:CSCO): INITIATING COVERAGE WITH A BUY AND $29 PT- Sterne Agee

Sterne Agee's Shaw Wu is trying to make a name for himself in a somewhat curious way - he is initiating host of large cap Tech names this morning, among them Cisco Systems (NASDAQ:CSCO) with a Street high target of $29.

I was somewhat stunned to see such optimism, so here's the thesis:

We are upbeat on networking growth and believe CSCO is well-positioned to benefit with the industry’s broadest networking portfolio. According to market research firms and CSCO’s Visual Networking Index (VNI), global IP traffic is expected to quadruple from 2009 to 2014 with an annual compound growth rate (CAGR) of 34%. The biggest driver is video which is expected to make up 1/3 of the traffic. In addition, the growing number of internet users and devices that access the internet, including smart phones, tablets, set-top boxes, and game consoles, is also increasing.

However, one of the big controversies with CSCO these days is that investors have pretty much given up and think the company will have a difficult time turning itself around. While we agree there are issues, we believe they are short-term in nature and fixable. And we would argue that this isn’t the first time CSCO has mis-executed on a product cycle only to turn itself in 12-18 months time. Looking at the stock over the past five years, it hit a bottom in August 2006 and March 2009 at the $14-$17 level, only to see very attractive returns afterwards. We believe we are near that inflection point. Like in the past, we believe CSCO will fix its problems and capitalize on a strong product cycle driven by the mobile internet, cloud computing, and Nexus data center switches.

Regardless, we believe sentiment has gotten too negative with CSCO shares discounting a lot of bad news trading at 9x CY12 EPS (7x excluding net cash). Moreover, we would like to note that about 29% of CSCO’s market capitalization is net cash. We find the riskreward favorable and believe patient investors with a longer-term horizon of 12-18 months will be rewarded.

Notablecalls: It's not every day you get to see a 70% upside call in Cisco (CSCO), so I guess it warrants some attention.

Also, take a look at the chart. After several quarters of disappointing results the stock seems to be forming a bottom of some sort. I wouldn't be surprised to see a bounce in the name in the n-t.

I'm looking for $17.75-18.00 levels.

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