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Cisco investors wary over rivalries and public debt
February 4, 2011 / 9:15 PM / 7 years ago

Cisco investors wary over rivalries and public debt

NEW YORK (Reuters) - No longer Wall Street’s top over-achiever, network equipment maker Cisco Systems Inc (CSCO.O) must persuade wary investors it can fight off rivals such as Hewlett-Packard Co (HPQ.N) and soothe concerns about public sector spending cuts.

Although most investors forecast modest year-over-year revenue growth, some said they were approaching Cisco’s quarterly report next Wednesday with caution after surprisingly weak forecasts in the past two quarters.

A high dividend payment or a confident outlook from Chief Executive John Chambers could prop up shares of the world’s top seller of routers and switches. But most analysts said concerns over U.S. and European debt as well as the uncertain global economy would limit any gains.

“We have pretty low expectations for Cisco,” said Channing Smith, managing director of Capital Advisors. “When a company stubs its toes with bad quarters, investors should expect the trend will easily take a couple more quarters to reverse.”

Analysts on average expect fiscal second-quarter revenue of around $10.23 billion, up 4 percent year-over-year but down 5 percent sequentially, according to Thomson Reuters I/B/E/S.

They also forecast third-quarter revenue to rise 5 percent from a year earlier to $10.84 billion, with the main focus on Chambers’ comments on the economy and technology spending.

Cisco’s global operations and a clientele spanning businesses and government agencies has made it one of the technology sector’s bellwethers.

The management team’s record of controlling costs and growing the business through acquisitions also made them a darling of tech investors over the years. But a fragile global economy has proven more damaging than initially expected.

In the previous quarter Chambers gave a dismal outlook and warned of a sharp fall in orders from the public sector.

“I‘m just looking for stabilization, an indication from the company that they’ve got a handle on demand, and hopefully more positive signs from the public sector,” Joel Achramowicz, analyst at Blaylock Robert Van.

PRESSURE FROM RIVALS

Last quarter’s weak outlook also stoked concerns that Cisco may be losing market share to competitors. In addition to industry peers like Juniper Networks Inc (JNPR.N), Alcatel-Lucent SA ALUA.PA and Huawei Technologies Co Ltd HWT.UL, HP is emerging as a tough competitor.

The two former resale partners have turned into rivals after Cisco announced plans in 2009 to enter HP’s territory of data center servers. HP in turn challenged Cisco by buying network equipment maker 3Com for around $3 billion.

HP recently began offering discounts to customers who trade in Cisco products. Cisco has retaliated with its own discounts and financing offers, analysts say.

“HP’s margins are generally lower than Cisco‘s, so they can tend to price more aggressively to a certain extent ... They could put pressure on Cisco short term,” said Achramowicz.

DIVIDEND AND DOUBLE-DIGIT GROWTH

Some analysts said good news could come in the form of a high dividend. Cisco has promised to begin paying a dividend in fiscal 2011, which ends in July, of around 1 to 2 percent.

“Near-term, we would view anything less than 1.5 percent dividend yield as a disappointment considering Intel is at 3.4 percent, Microsoft 2.3 percent, and IBM 1.6 percent,” said RBC Capital Markets analyst Mark Sue.

Other analysts had more modest expectations, saying the initial yield will likely be set at the lower end of the 1-2 percent band. Anything higher, some said, could boost Cisco’s shares which are still down 10 percent from last quarter.

Some said the shares looked modestly attractive, trading at below 13 times forward earnings estimates. That’s lower than Juniper’s multiple of 24, and 31 percent lower than Cisco’s performance over the past decade, according to StarMine.

Most analysts, however, said their main concern was whether Cisco could achieve its long-term target of growing revenue by around 12 to 17 percent each year.

The company has said it can grow by entering new markets like data center servers, video conferencing and smart grid technology. But investors said they would like more reassurance that these projects will soon turn more profitable.

“They have new market opportunities which will likely result in tremendous growth over the next decade. But they’re in the early innings ... and not yet in a position to offset share losses in the more mature business lines,” said Smith.

But he agreed with other investors who said Cisco was still a solid, long-term investment, as its products were crucial to new technologies like mobile Internet and cloud computing.

“Are they challenged? Absolutely. But outside of Apple and Google, we don’t see a company in the technology space that is as well positioned for growth.”

Editing by Bernard Orr

Our Standards:The Thomson Reuters Trust Principles.
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