The Bullish and Bearish Case for Cisco Systems in 2014

For starters, there are many macroeconomic factors to consider. The Dow rose more than 26% and the S&P 500 rose almost 30% in 2013. Now the Federal Reserve is about to get a new chairman, with Ben Bernanke being replaced by Janet Yellen. It is widely expected that interest rates are going to rise, but those rates may not rise by as much as some bond bears fear. The world’s developed and emerging markets are exiting their recessions at the same time that U.S. gross domestic product is ticking up.

Cisco’s outlook went from a promising turnaround to one of serious question. The company’s outlook and explanation was bad enough that Goldman Sachs booted it off the prized Conviction Buy List.

Cisco’s gain in 2013 was more than 16%, but it actually lost about 3.5% in the final quarter of 2013. Its current dividend yield for 2014 is around 3%. The networking equipment giant closed out 2013 at $22.43, the consensus analyst price target is $23.57 and the 52-week trading range is $19.98 to $26.49.

Cisco’s bullish case is one where perhaps CEO John Chambers was simply too negative. Maybe China will not really penalize Cisco in equipment orders because of the NSA and Snowden scandal, nor for retaliation that U.S. government agencies discriminate against Huawei. This industry leader also trades at only about 11 times expected 2014 earnings. And Cisco buys back enough shares each year to offer support for the stock. Another thing going for it is that its dividend is now more than 3%. Barron’s said Cisco has a very low valuation with ample cash at the end of 2013, and S&P even upgraded its credit rating outlook.

The bearish case for Cisco is one of a credibility loss. While Goldman Sachs threw it off that prized Conviction Buy list, analysts fled in droves after the company’s guidance. Cisco now seems to be a Chinese hit list. The company’s restructuring efforts have been thwarted due to its revenue disruption. Another issue is that Cisco’s woes were bad enough that investors feel like Cisco could have telegraphed this ahead in a better way rather than in the shock it delivered in November.

Investors seem to have always been patient for Cisco, going back even a full decade. Its expected gain for 2014 is an implied 5%, if analysts are correct, but that would have been far higher without the downward revisions. Maybe everyone, including Cisco’s management, was just too pessimistic here. Maybe.