Why More Analysts Are Chasing Cisco Higher

When Cisco Systems Inc. (NASDAQ: CSCO) reported fiscal second-quarter financial results late on Wednesday, overall the results were positive. Investors and analysts were in agreement and both chased the stock higher.

24/7 Wall St. has included some of the key highlights from the earnings report, as well as what a few analysts are saying about Cisco after the report.

The company said that it had $0.57 in earnings per share (EPS) and $11.6 billion in revenue. The consensus estimates from Thomson Reuters were $0.56 in EPS on revenue of $11.55 billion. The same period of last year reportedly had EPS $0.57 and $11.93 billion in revenue.

Deferred revenue was $17.1 billion, up 13% in total, with deferred product revenue up 19%, driven largely by subscription-based and software offerings. Deferred service revenue was up 9%. The portion of product deferred revenue related to recurring software and subscription businesses grew 51%.

In terms of guidance for the fiscal third quarter, the company expects to see EPS in the range of $0.57 to $0.59 and revenues are expected to range between flat and down 2%. The consensus estimates call for $0.58 in EPS and $11.86 billion in revenue.

Merrill Lynch’s Tal Liani maintained a Neutral rating and raised the price objective to $36 from $33. The brokerage firm commented in its report:

Results and guidance were largely in-line with Street estimates as security/collaboration offset switching/routing weakness. Easy comps in campus switching and stabilizing Service Provider spend will provide a slight lift going forward. We reiterate Neutral as valuation is now towards the higher-end of its historical range, but growth remains subdued.

Credit Suisse maintained its Underperform rating but raised its price target to $27 from $25. The firm’s main concern is that some of the levers, which Cisco has had in recent quarters to offset switching decline, may be running out. For example in the current quarter, four of nine divisions saw a revenue decline on a year-over-year basis, with previously strong growth areas such as data center again in decline. Also, while the company has executed very well on the cost front, additional gross margin leverage is unlikely with the company noting slightly heightened pricing and reporting product gross margin of 62.4%, which is close to record highs.

Oppenheimer’s Ittai Kidron and Michael Leonard detailed in their report:

Cisco reported results just above consensus, with in-line guidance accompanied by cautious commentary on service provider and emerging markets. Trends were largely unchanged, with better-than-expected growth in Security, Collaboration, and Wireless offsetting weak revenue in Switching and Routing. Weakness in Data Center also persisted, although the recent announcement of Azure Stack-ready UCS is an encouraging sign. Execution remains solid, with strong margins and progress on the shift to subscription-based solutions. Illustrating the progress, recurring revenue climbed to 10% of product revenue for the first time. We’re positive on the transition to software/subscriptions, which, combined with share repurchases/repatriation and an increased dividend, offers a favorable backdrop for multiple expansion. Raising PT to $36 from $34.

A few other analysts weighed in on Cisco as well:

  • MKM Partners has a Neutral rating and raised the price target to $35 from $31.
  • BMO has an Outperform rating and raised its price target to $37 from $33.
  • Bernstein has an Outperform rating and raised the price target from $35 to $37.
  • Raymond James raised the price target to $34 from $33.
  • Wunderlich Securities has a Hold rating raised the price target to $30 from $27.
  • RBC has an Outperform rating and raised its price target to $37 from $35.
  • UBS raised its price target to $37 from $35.

Shares of Cisco were trading up 3% at $33.90 on Thursday, with a consensus analyst price target of $33.26 and a 52-week trading range of $25.65 to $33.97.

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