Cisco Systems, Inc. (NASDAQ: CSCO) is set to report earnings after the close of trading today. We commented on Monday how it was impossible not to see how little the formal earnings estimates had come down. It seemed as though the crowd of analysts was keeping the bar set way too high when you consider the economy and that the stock had been halved.
Estimates from Thomas Reuters (First Call) appear to have remained at$0.39 EPS on $10.3 billion in revenues. It is only for the quartersahead that the estimates have come down over the last 48-hour period.For the quarter ahead, the estimates are $0.39 EPS (down from $0.40 on Monday) and $10.41 billion in revenues (down from $10.49 billionMonday). For its fiscal year ending in July, estimates are $1.60 EPS(down from $1.64 Monday) and $42.16 billion in revenues (down from$42.52 billion on Monday).
Estimates for the coming fiscal year over the last 3-month period hadgradually crept lower from $1.69 to $1.64, and now they sit at $1.60EPS. We cannot say if this quite enough of an estimate cut or not, butwe would refer to the John Chambers comments of the past where he saidmuch of Cisco’s growth ahead would be GDP-dependent.
Based upon late-morning trading prices, we think that options tradersare braced for a price move of roughly $1.20 in either direction. Thisstock is still so far under its key moving averages that the stockcould move $2.00 or more before serious technical issues arise. Its5–day moving average is $20.61. Shares are currently trading backabove its 20-day moving average of $17.68.
Cisco has one of the fastest abilities to report earnings and sales ona company-wide basis because of micromanagement of its sales force andconstant reporting and updating it requires its salespeople topractice. Some have even noted that there is essentially a 72-hourlook-back that management can ballpark its estimates on. It seems thatif any disasters for this last quarter were there then the informationwould have officially or unofficially worked its way out onto WallStreet.
The economy stinks right now from government and enterprise spending to small business spending to Joe Public’s consumerspending. There is no hiding that issue. We are seeing evidence dailythat technology spending on computers and equipment is slowingahead even on personal computing. Starting in late September and intoearly and mid-October we saw more and more technology companies noting"a sudden and rapid drop off or orders at the end of September." Wehave also seen almost every large telecom equipment operator discusschallenging times, and that coincides with many cap-ex concerns frommajor telecom operators for the rest of 2008 and into 2009.
Our take on this is that when you add all of this up, it is hard to notimagine that analyst estimates for the quarter and fiscal year aheadmay still need to come down. We might be overly cautious here on thisand we still think this stock has been punished more than it shouldhave, but we will be out blasting any Wall Street researcher thatclaims to have been caught off guard if John Chambers gives slightlymore cool guidance then the current numbers.
Until last week’s recovery and market rally, Cisco’s stock was downover 50% from its 52-week highs. If we take off another dime fromearnings expectations for 2009 and assign a lower $1.50 EPS targetrather than $1.60 consensus, we still would have a cash-richmega-leader that has an established one-stop shop dominance over everycompetitor globally which trades at trading at roughly 12-times forwardearnings. If the company did not buy back too much stock this quarter,its cash position may soon reach the $30 billion mark.
It is our take that a more tepid Cisco should be factored in at today’sprices. If the company is able to refute that and able to be morepositive in a more than challenging environment, then shareholdersshould be smiling tomorrow.
Jon C. Ogg
November 5, 2008
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