Citi Downgrades Cisco After Dismal Earnings Report

Citi is downgrading Cisco

to Hold from Buy and lowers its target price to $22. For the third consecutive quarter, CSCO disappointed investors with gross margin shortfall being the culprit this time around. Gross margins are under pressure with the transition to new lower-margin routing and switching platforms while at the same time dramatically better price/performance on new platforms is depressing revenue growth. Given these cross currents and Citi's belief that competitive pressures will only intensify as the company moves through CY11, Citi believes that shares likely remain range-bound until investors regain confidence in the growth and margin trajectory at CSCO. Citi's top IT hardware pick remains HPQ given compelling valuation and an improving margin profile. Citi lowers its FY11 EPS to $1.58 from $1.61, despite a 2% increase to Citi's top-line ests. FY12 EPS goes to $1.72 from $1.77, despite a 3% increase to top-line. Citi's target price goes to $22 and has a Hold rating on CSCO. CSCO closed Wednesday at $20.13