A disappointing forecast in August, hinting at weakness in China and corporate tech-spending, pushed Cisco Systems Inc. shares down. The question when Cisco reports its performance against that forecast this week is whether the trend will continue.
Cisco CSCO, -1.25% is seen as one of the biggest barometers of tech spending globally, due to its dominance of the networking sector and the fact that a slowdown in network purchases can presage problems in other tech sectors. Several analysts think Cisco will say that tech spending is in trouble when it reports fiscal first-quarter results on Wednesday, but many also think the San Jose, Calif.-based networking company is in better shape than its rivals.
“We think expectations are fairly muted for Cisco given softer commentary by a host of peers regarding trends on IT spend, especially when it comes to large enterprises and service providers,” Evercore ISI analyst Amit Daryanani warned in a note Nov. 8. Nonetheless, he maintained an Outperform rating and price target of $60 on Cisco shares, 23% above its closing price on Friday.
Daryanani was referring to Juniper Networks Inc.’s JNPR, +0.80% third-quarter financial report last month, in which Chief Executive Rami Rahim acknowledged “service provider spending remains challenged and we experienced weaker than expected enterprise orders in the September quarter,” and to similar comments from International Business Machines Corp. IBM, -1.69%
“What I’ve seen play out in third quarter, while we’ve got a headwind right in front of us on [global technology services] in fourth quarter, nothing would change my mind with regards to 2020 on driving sustainable revenue growth overall,” IBM Chief Financial Officer Jim Kavanaugh said on an analyst call last month.
The global economic challenges facing Cisco are likely to prompt cost-cutting and extend its “business pivot toward software and recurring revenue” to its partners, Raymond James analyst Simon Leopold said in a Nov. 7 note that reiterates an Outperform rating and price target of $59. (Cisco cut about 500 Silicon Valley jobs, according to documents filed with the state of California in August.)
Expectations are for flat sales and comparable earnings. Not all the prognostications are so dour, however.
In its summary of hardware and communications equipment companies, Barclays believes Cisco and Hewlett Packard Enterprise Co. HPE, +0.34% are best positioned to take advantage of recent momentum in spending on computer networking.
“Our checks suggest that tough conditions have persisted but have not worsened,” Oppenheimer analyst John Stoltzfus added in a Nov. 4 note. “We see signs of resiliency in WLAN, security, and campus switching spending and believe Cisco has appropriately reset the bar to a level where it can deliver in-line results and offer in-line guidance.”
What to expect
Earnings: Analysts polled by FactSet on average expect Cisco to report adjusted earnings of 81 cents a share, after Cisco projected 81 cents to 83 cents a share. Contributors to Estimize — a software platform that crowdsources estimates from hedge-fund executives, brokerages, buy-side analysts and others — on average expect adjusted earnings of 83 cents a share. In the same quarter a year ago, Cisco reported adjusted earnings of 75 cents a share, with GAAP earnings of 77 cents a share.
Revenue: Analysts on average project that Cisco will report $13.07 billion in revenue, according to FactSet, the bottom of its guidance range. Estimize contributors expect $13.16 billion on average. In the fiscal first quarter a year ago, Cisco reported $13.07 billion in sales.
Stock movement: Cisco stock suffered its worst post-earnings performance in more than five years after its fiscal fourth-quarter earnings report in August, breaking a streak of four straight gains following earnings. Shares are still up 11.5% this year, as the S&P 500 index SPX, -0.19% has gained 23.4% and the Dow Jones Industrial Average DJIA, +0.07% — which counts Cisco as a component — has increased 18.7%.
Analysts are generally bullish on Cisco, with FactSet tracking 15 analysts calling the stock the equivalent of a buy and 12 rating it a hold, with none recommending selling shares. The average price target is $48.31, representing a premium of more than 13% to the going rate.