Is Cisco a buy at $19 into earnings?
With Juniper’s Q1 better than expected and a Q2 forecast of lowered expectations, what can we look to for Cisco Systems (CSCO)? Cisco is going to report Q3 2012 earnings on May 10th and with John Chambers keeping expectations low, it could be a good buy into earnings. Over the last month we also saw Cisco’s stock drop over 10% versus the Nasdaq which only dropped 5%. Versus other large cap technology companies, this could provide upside potential if earnings beat expectations.
Cisco, a world leader selling Ethernet switches, routers and other equipment has continued to benefit from a restructuring effort announced mid 2011 to improve slow revenue growth and improve competition from rivals Juniper Networks (JNPR) , Hewlett-Packard (HPQ) and Chinese competitor Huawei. Some fear of macro-economic head winds and competition from rivals could potentially derail Cisco, but Chambers has been cautious around this.
Since a bad quarter a year ago, Cisco has had a couple of decent quarters and I think we will see another one this weekend. I’m not expecting anything huge, but guidance from Chambers has been low with benchmarks of 5-7% growth, I think Cisco can improve on that.
Beyond low GDP issues for Cisco and increased competition in the Ethernet Switching business (31% of revenue), recent CIO surveys have been favorable to Cisco. One of the big questions will be what will margins look like? The company has been aggressive with the competition and if pricing is going to stay competitive we could see a continued downward trend of gross profit margins. This could potentially be dangerous even if earnings beat.
Overall I see Cisco as being highly competitive and with over 30B in net cash I think they should be able to keep pricing competitive and improve on current products.
