With the start of a trade war between China and the United States, investors are trying to figure out where their assets are best shielded from any fallout. That can be rather difficult when it comes to looking for U.S. technology companies without much China exposure. According to Merrill Lynch, Cisco Systems Inc. (NASDAQ: CSCO) is that U.S. tech giant with low China exposure.
It is important to understand that this call is in part an earnings preview for the company. On top of low China exposure, Merrill sees upside from the branch and campus office upgrade cycle. Part of the call is valuation as well, with Cisco shares down about 9%, compared with a 3% drop for the S&P 500, over the past month.
Merrill’s Tal Liani sees the Cat9k upgrade cycle as still in the early innings for positive margin improvement, shifting the business mix to software and for lifting many of Cisco’s core businesses. The report also signals new opportunities with Wi-Fi 6 and SD-WAN likely to fuel the campus upgrade cycle into 2020. Liani also flagged Cisco’s relatively low exposure to China as particularly attractive in the current market environment.
As far as the low exposure to China, Liani noted that Cisco has been actively shifting contract manufacturing and pricing to offset the previous 10% tariffs on Chinese-produced goods. Those workarounds also are expected to help soften the recent 25% tariff hike.
Tuesday’s report also points to Cisco winning from Huawei’s recent woes:
Separately, we note that backlash versus Huawei’s products in certain regions may help Cisco indirectly, and we refer investors to our recent Huawei deep-dive to see the overlapping product areas. Lastly, competitor Arista signaled slowing webscale capex spending (primarily at Microsoft), and we believe Cisco may be relatively insulated given lower participation at webscale players, with potential share gains for Cisco’s 400G switching family.
Merrill has a $56 price objective for Cisco Systems. The firm’s investment rationale says this:
We rate Cisco a Buy based on our belief that its revenues will begin to reaccelerate modestly as market share stabilizes and Cisco shifts more revenue to higher growth recurring software/services. We also believe margins are stable and see upside for capital returns slowing over the next 12-18 months. Additionally, Cisco has a roughly 3.2% current dividend yield and provides stable growth for investors, limiting downside.
Cisco was last seen trading up 1.7% at $52.17 on Tuesday. It has a Refinitiv consensus analyst target price of $55.96 and a 52-week trading range of $40.25 to $57.53.
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