Last week, Cisco’s share price (NASDAQ: CSCO) was hammered following the release of the company’s fourth-quarter results. It wasn’t the results that spooked the market, but guidance for the next quarter which was lowered. Analysts are now saying the selling has been overdone and the stock is now a bargain. That may be true if the market does recover, but Cisco won’t be immune to a longer slowdown in technology spending.
Fourth-quarter revenues rose 6% year on year to $13.4 billion. This was just ahead of estimates and a solid result. Non-GAAP EPS were $0.83 and just ahead of consensus while GAAP EPS of $0.51 missed estimates by $0.22.
The company reported solid growth in all segments apart from the Service Provider segment. Cisco’s CEO, Chuck Robbins, noted weakness in China where revenue fell 25%. He said that Cisco’s teams in China are beginning to notice Chinese customers favouring local providers wherever possible.
Lower Guidance Due to Macro Environment
Cisco lowered EPS guidance for the first quarter to between 80 and 82 cents, from the 83 cent number analysts expected. They also see first-quarter revenue flat to 2% higher.
In an interview with CNBC’s Jim Cramer, Robbins said guidance was lowered as the company noticed changes in the macro-environment in July. He went on to say that he didn’t know if the perceived slowdown was “temporary or the beginning of something bigger.”
Cisco enjoys strong margins which have improved over the last 18 months. The company’s ROE is also excellent at over 30%. There’s also the 2.89% dividend yield and the company has a strong cash position.
The fourth-quarter print puts the trailing earnings multiple at 17 and the PEG ratio at 2.5. Analysts are looking for earnings growth of 7% which implies a forward multiple of 17. That’s not as cheap as some are making out, but probably justified considering the profitability of the business.
Cisco Is a Play on the Entire Sector
There is clearly a chance that earnings growth will slow to below 2% in the next 12 months — the company wouldn’t have lowered guidance if they didn’t feel that scenario likely. If that does happen, it would probably be accompanied by a slowdown and a selloff for the entire sector — in which case Cisco would not be spared.
Some analysts have pointed out that Cisco has driven growth by making acquisitions, some at quite high valuations. That doesn’t matter now, but it will if there’s a larger downturn in the sector.
Last week’s reversal from the $46 level does, however, offer a risk point to trade-off. An entry at $48 would have downside of 4 to 5%, and potential upside of 18% if the previous highs are reached.
If that $46 level is retested and holds again, that would create an even better entry point with defined downside and significant potential for upside. Traders not wanting to risk missing out can still use $46 as a stop loss, but should exit if the stock price fails at $51.