Why Analysts Are Still Positive on Cisco Even After This Report

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Cisco Systems Inc. (NASDAQ: CSCO) reported its fiscal third-quarter financial results after markets closed Wednesday. Although Cisco met its estimates for the quarter, the report was relatively weak on its outlook for the coming quarter. This largely offset what would have been a solid quarter in terms of results and M&A.

Investors might have sent shares lower after the report, but this did little to deter analysts who were positive on the results, for the most part.

24/7 Wall St. has reviewed the earnings report and included some key highlights, as well as what analysts are saying about this networking giant.

The company posted $0.60 in earnings per share (EPS) and $11.9 billion in revenue, versus consensus estimates from Thomson Reuters that called for $0.58 in EPS and revenue of $11.9 billion. In the same period of last year, Cisco posted EPS of $0.57 and $12.0 billion in revenue.

Deferred revenue totaled $17.3 billion, up 13% from last year, with deferred product revenue up 26%, driven largely by subscription-based and software offerings. Deferred service revenue was 7% higher.

In terms of the outlook for the coming quarter, the company expects to see EPS in the range of $0.60 to $0.62 and revenues declining between 4% and 6% from the same period last year. The consensus estimates are $0.62 in EPS and $12.51 billion in revenue.

JMP Securities has a Market Perform rating. The firm commented:

We maintain our Market Perform rating on Cisco Systems after the company reported modest F3Q17 EPS and revenue upside, but guided F4Q17 EPS and revenues below consensus, leading the stock to trade down ~8% in the aftermarket. We note Cisco had a 14-week quarter in F3Q16, compared to a normal 13-week quarter this year, creating a difficult compare that negatively impacted revenue growth by 2%. In our view, highlights from the quarter include: 1) Cisco generated 51% growth in deferred revenue for software and subscription sales, in line with the prior quarter, demonstrating a continued shift toward software and away from hardware; 2) data center switching growth accelerated to 42% Y/Y from 28% in the prior quarter, the best growth in a year, which we think bodes well for Arista Networks.

Credit Suisse said in its report on Cisco:

In our M&A analysis, we see long term CSCO EPS power of $3.30-$3.50, > 40% above current levels, of which 22% is driven by buyback with the rest from M&A accretion. Our standalone base case allows for continued growth in areas such as Security and Services to offset Switching and Data Center share loss, and GM [gross margin] pressure (we explicitly assume a 1000bps long term contraction in switching GM), Even in such a scenario we see standalone EPS trending towards $2.50, suggesting upside. Our TP [target price] of $40 is a blended average of these scenarios as well as our long term DCF [distributable cash flow].

Some other analysts also weighed in on the stock:

  • Baird reiterated a Buy rating.
  • Jefferies reiterated a Buy rating with a $37 price target.
  • Cowen reiterated an Outperform rating.
  • Wunderlich reiterated a Hold rating with a $30 price target.
  • Pacific Crest reiterated an Overweight rating with a $33 price target.
  • Deutsche Bank reiterated a Buy rating with a $40 price target.
  • Citigroup reiterated a Buy rating with a $36 price target.
  • FBN Securities retained its Outperform rating but lowered its target to $35 from $37.
  • Morgan Stanley reiterated an Overweight rating and kept its $39 price target.
  • Barclays reiterated its Overweight rating with a $34 price target.
  • BMO Capital Markets reiterated its Market Perform rating but cut its target from $35 to $32.
  • Raymond James reiterated its Outperform rating with a $36 price target.

Shares of Cisco closed Friday at $31.21, with a consensus analyst price target of $34.83 and a 52-week trading range of $27.13 to $34.60. Over the course of the week the stock dropped 6.7%, mainly as a result of earnings.