Cisco Systems (CSCO-NASDAQ) is set to report earnings next Tuesday. While there are many others, this is the biggie for tech heads. This stock was just maintained a BUY at Goldman Sachs this morning in anticipation that it will beat earnings expectations and a belief that management is likely to re-affirm positive longer-term trends after the close next Tuesday (FEB 6). CSCO used to either just meet or beat by a tad, but lately they have been beating by a couple cents on EPS.
The street is looking for expectations of $0.31 EPS and roughly $8.28 Billion in revenues. If the company offers guidance the expectation is $0.33 and $8.55 Billion next quarter.
This BUY from Goldman is one of the few recent positive calls along with an AmTech Research calling it a Buy. In roughly the last two weeks CSCO has been downgraded at many large firms: cut to Hold at Citigroup, cut to Market Perform at JMP Securities, Cut to Neutral at Banc of America, and cut to Neutral at Prudential.
It started the November quarter at roughly $24.00 and it had recently hit as high as $28.99, and it is up from a $17.10 low in the last year. So the valuation comments were the reasons for the downgrades and many of the analysts had been left holding the bag back in early 2004 when the stock was sniffing at $30.00. It’s an entirely different company now after some key acquisitions so we’ll see if it can get back the mojo it recently lost.
As far as other fallout in direct supplier or tied stocks: NetLogic (NETL) has 60% of its business tied to CSCO and Clestica (CLS) also has historically been viewed as the EMS company most tied to CSCO manufacturing. Cypress Semi (CY) is also the chip stock with much Cisco exposure on a historical basis.
One important thing to note in other fallout stocks in sectors is that Cisco has turned into a bifurcated tech stock. If Cisco’s business is suddenly deemed bad on an unexpected basis then the fallout in the tech sector could continue because they are deemed one of the brighter spots in tech now. If they do well it may not lift the entire sector because they are already thought of as an exception to the rule right now.
Even though the stock has come back in, this is deemed as valuation calls from analysts who wanted to lock in some gains. It isn’t as though the expectations are really looking for a slowdown. The average price target is still $29.00 to $30.00, so keep in mind that at current prices there could easily be the belief that the great part of the turnaround has happened and it will have to really show massive upside to keep everyone from using strength to lock in gains until later in the year. My partner here has a scenario that could give it a $34.00 target by the middle of the year if things go right, so we’ll have to see how time goes. This was also noted as Cramer’s #3 Growth Pick for 2007. Cramer also had Cisco as one of his 5 Tech Exceptions for now.
Stay tuned Tuesday, but be sure to watch the "consensus" estimates. It is very frequent that the First Call, Zacks, Reuters and others change their consensus matrix ahead of numbers; so if there is a change by Tuesday that is what the deal is. We will send an "options trader" expectation on this after the close on Monday because that will eliminate the weekend-premium you’d have to account for between now and then.
Jon C. Ogg
February 2, 2007
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