Have Cisco Earnings Expectations Come Down Enough? (CSCO)

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Cisco Systems, Inc. (NASDAQ: CSCO) is set to report earnings after the close of trading on Wednesday.  While many technology, telecom, and networking companies have grown more cautious, it is almost impossible not to notice that the earnings estimates for the networking behemoth have only come down marginally.

Estimates from Thomas Reuters (First Call) are$0.39 EPS on $10.3 billion in revenue.  For the quarter ahead, theestimates are $0.40 EPS and $10.49 billion in revenues. For its fiscal year ending in July, estimates are $1.64 EPS and $42.52 billion in revenue.

So where are the problems?  One issue is the rate of change from priorperiods.  In the last 75 days or so, consensus for thequarter-ended in October went from $0.40 to $0.39EPS.  And for the quarter ending January 2009, the estimateshave only dropped $0.01 in the last few weeks from $0.41 to $0.40.  Estimates for the fiscal year over the last3-month period have gradually crept lower from $1.69 to$1.64 consensus.

Investors will not focus so much on thecompany’s past quarter which will be the bulk of the earnings report, but rather the guidance from the conference call.  Cisco has one ofthe fastest abilities to report earnings and sales on a company-widebasis because of micromanagement of its sales force and constantreporting and updating it requires its salespeople to practice.  Somehave even noted that there is essentially a 72-hour look-back thatmanagement can ballpark its estimates on.  That being said, we feelthat if any disasters for this last quarter were there then theinformation would have officially or unofficially worked its way outonto Wall Street.

But Cisco is not immune to the economy. CEO John Chambers has even saidthat the company’s top-line growth would be dependent on GDP and globaleconomies.  The economy sucks right now from government and enterprisespending down to small business spending down to Joe Public’s consumerspending.  We are seeing evidence that technology spending on computersand equipment is also slowing ahead even on personal computing, and thePC power available for under $500 now is mind boggling.  Starting inlate September and into early and mid-October we saw more and moretechnology companies noting "a sudden and rapid drop off or orders atthe end of September.  We have also seen almost every large telecomequipment operator discuss challenging times, and that coincides withmany cap-ex concerns from major telecom operators for the rest of 2008and into 2009.

When you add all of this up, it is hard to not imagine that analystestimates for the January-2009 Q2 period and for the Fiscal July-2009can really come in at the expected levels.

It is far too soon to determine or pass around and whisper numbers, butit would seem to be an easy assumption that last minute analyst callsmight be changing some of the estimates for this next quarter and forthe company’s fiscal year targets.

About the only good news is on performance and valuations.  Until lastweek’s recovery and market rally, Cisco’s stock was down over 50% fromits 52-week highs.  Also, even if we take off almost 10% from earningsexpectations for 2009 and assign a lower $1.50 EPS target rather than$1.64 consensus we still would have an industry leader that has anestablished one-stop shop dominance trading at roughly 11.7-timesforward earnings.

Cisco deserves much praise for what it has accomplished.  It has grownfrom a routing and switching giant to a one-stop shop that can accommodate data, voice, and video communications from every singlepoint after the data plug (or wireless node) on your PC all the way tothe same spot for servers.  It might not control every aspect oftechnology you and businesses use for the internet, but it does offerthe technology for everything between you and the servers you aretrying to access.  It truly is the internet backbone. 

November 13 is annual shareholder meeting, so some of the great datadiscussions that would normally come out with earnings might be savedfor that meeting.

The economy is not the company’s fault, but it will likely be itsproblem just like it is for the rest of us.  So now we just have todecide if a 50% sell-off in the stock and a forward interpolatedmultiple of under 12-times earnings for one of the world’s greatestcompanies is cheap enough. 

Jon C. Ogg
November 3, 2008