Explaining the Cisco Drop (CSCO)

There have been many inquires around on Cisco Systems (NASDAQ: CSCO) this morning.  There are two issues moving the stock, of which one is real and one is conjecture.

CEO John Chambers gave an interview to Reuters yesterday calling the future CEO as more of a head of a group rather than a command and control CEO, which some are taking as the first hints that Chambers may be looking for the door.  This appears to not be the case, or at least it doesn’t appear to be inconsistent with past indications of recent years.  We wouldn’t even grace this one as a rumor.

But there is a research note this morning from UBS (which would have started making its ways around the institutions yesterday at the close or after the close.  UBS has maintained a NEUTRAL rating on the stock, but lowered its price target to $25.50 from a prior target of $27.00.  This is based on its channel checks suggesting that enterprise spending remains challenging with a further slowing in the U.S. markets (particularly West Coast)) and an expected slowing in Europe from last quarter.  UBS also noted that channel checks in emerging markets show an improvement from the low 10% year over year order growth in Q3-2008, but it doesn’t expect to see a recovery to the 30%+ levels.

This note also states, "we would not be surprised to see Cisco guide flat to down sequentially for 4Q08 given historical seasonality in challenging times. The Street is currently up 1.2% q/q at $10.436B, vs. UBS estimate at $10.230B."

The company also has a technology webcast later today, which you can access here.

Cisco shares are down 2.5% at $22.30 after closing up about 1.5% yesterday at $22.88.  Yesterday we saw over 2 million shares trade in the after-hours session and this morning we have seen almost 600,000 shares trade hands in the pre-market venue.

Jon C. Ogg
July 9, 2008