Shares of Cisco Systems (CSCO) are down 38 cents, or 1.8%, at $20.06 this morning following the company’s better-than-expected fiscal Q2 report last night and a better-than-expected Q3 view.
What’s the problem? The Street seems to be quite divided over the matter, with two downgrades, that I can see, but another group increasing price targets.
Cisco’s outlook for revenue to be about the same this quarter as it was last quarter was explained by CEO John Chambers as being “the better part of prudence” given ongoing economic worries in Europe, but analysts noted that a flat quarter is atypical of Cisco, which usually sees growth in Q3 from Q2.
However, the company also had new product order growth of just 7% last quarter, down from 13% in the prior quarter, and that suggests to some that revenue growth could be weaker going forward.
Bullish!
Joanna Makris, Mizuho Securities: Reiterates a Buy rating and raises her price target by a dollar to $24. The stock is cheap, trading at 10 times forward earnings versus a five-year average of 17 times, and the company’s own forecast is “conservative,” she thinks, with targets that are “achievable.” “Service provider revenues grew 12% Y/Y, bolstered by strength in switching and routing (+8% Y/Y revenue growth for each)– suggesting share gains, contrary to recent performance at Juniper.”
Paul Silverstein, Credit Suisse: Reiterates an Outperform rating on the shares, and raises his price target by a dollar to $27. He’s not worried about competition, arguing that Cisco is a threat to Juniper Networks (JNPR) and Hewlett-Packard (HPQ), not the other way around. And he sees steady improvement in recent trends: ” While mix shift and comp likely to lead to further long-term erosion, we think rel stable GM and stable to improving oper margin is more likely in the near-term as CSCO drives further improvement in its switching and routing GM and shows opex discipline.” Silverstein is not concerned about the product order growth rate: “While down from the levels of the preceding quarter, Cisco�s product order growth remains above Cisco�s guidance of 5 � 7% revenue growth both for its fiscal third quarter and over the longer-term. The order growth rates also strike us as solid to better than expected given the prevailing macroeconomic environment and related outlook for enterprise IT spend and service provider capital expenditures.”
Sandeep Shyamsukha, Auriga Securities: Reiterates a Buy rating and a $24 price target, writing that the “cautious” fiscal Q3 outlook from the company was “conservative,” in his view, and he sees “room of additional upside.” “CSCO seems to be clearly outperforming its peer group in multiple segments like servers, routers, video and collaboration; we expect the product cycle driven share gains to continue over the next several quarters. Gross margins came in flat and management sounded confident about keeping it stable, despite headwinds from an unfavorable product mix.” Shyamsukha increased his fiscal ’12 estimate to $46.4 billion and $1.87 per share from a prior $46.3 billion and $1.84.
Bearish!
Jayson Noland, R.W. Baird: Reiterates a Neutral rating and a $21 price target. The stock is fairly valued at current levels, he thinks. “Corporate gross margin was solid, but product gross margin of 60.9% was down (40 bps) sequentially and (20 bps) YoY. Strength in lower-margin UCS and Service Provider Video lines, in addition to discounts, caused the decline [�] Service Provider revenue was up 12% YoY and management mentioned high-end routing strength in the US, Japan, and China. Management underscored their positive outlook has significantly diverged from peers such as Juniper.”
Michael Genovese, MKM Partners: Cut his rating last night to Neutral from Buy, writing that the deceleration from 13% order growth to 7% order growth in the quarter was a reversal of trend that is a cause for concern, and means the outlook could be weak. “To be fair, the order comp was not super easy given that Book-to-Bill was above 1.0 in the year-ago quarter and at approximately 1.0 in 2QFY12. However, it was also not super tough given that product orders were up only 8% y/y in 2QFY11, and in the third quarter of a deceleration trend down from the high of 34% in 3QFY10. In our view, the 2QFY12 product order deceleration raises concerns about the near-term outlook and explains the flattish sequential revenue guidance better than the �they are just being conservative� line of reasoning we expect many will take. Our concerns are especially acute considering that the y/y product order comparisons become much tougher in 4QFY12 (July).”
Brian Marshall, ISI Group: Cut his rating to Neutral from Buy, writing that “CSCO�s risk/reward profile is now balanced and a BUY rating is no longer justified at current levels (e.g., <10% upside to our price target of $22.00.)” Marshall thinks slowing revenue growth and “stagnant” gross margin suggest there’s better money to be made in Juniper Networks (JNPR): “In our view, JNPR possesses the following key attributes: low expectations, Y/Y revenue growth bottoming, pent-up demand from Service Providers and a compelling cost/bit story driven by T4000 and PTX. We believe JNPR is where CSCO was 6+ months ago…�forgotten, unloved and without a date to the dance.� In fact, JNPR represents the best risk/reward profile in our coverage universe today at ~2.3-to-1.0 (with upside to ~$30 and downside to ~$20), in our view.”
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