Credit Suisse Sees 16% Further Downside In Cisco Shares Following Q1 Results

• Cisco Systems, Inc. CSCO shares are down 5 percent in the last six months, having plunged from above $29 to below $25 within a week in August.
• Credit Suisse’s Kulbinder Garcha maintained an Underperform rating on the company, with a price target of $22.
• The 2Q guidance reflects continued deceleration in Cisco’s business, and with margins expected to remain under pressure, its EPS growth may be minimal in the longer term, Garcha said.

Cisco reported its F1Q16 results, with revenues of $12.7bn, in-line with expectations. The company’s EPS, at $0.59, was ahead CS and Street estimates. Cisco’s Q2 guidance implies continued deceleration in the company’s business, with revenue growth projected at 0-2 percent y/y and EPS at $0.54 at the midpoint, analyst Kulbinder Garcha said.

Although management’s tone regarding deferred revenue on the product side was reassuring, it noted some macroeconomic weakness, with a 3 percent y/y decline in Enterprise orders. While switching growth in 1Q was robust, switching growth for 2Q is projected at 1 percent y/y. Garcha expects switching revenue growth to decelerate to 1.9 percent in FY16 and to 0.3 percent in FY17.

Total revenues for FY16 and FY17 are estimated at $49.8bn and $51.9bn, representing growth of 1.2 percent and 4.3 percent, respectively. The EPS estimates for FY16 and FY17 have both been reduced from $2.20 to $2.24.

Cisco’s operating margin in 1Q came in at 30.5 percent, and is expected to contract to 29.1 percent in FY16 and to 27.6 percent in FY17.

In the report Credit Suisse noted, “We believe that management is increasingly making a trade off in optimizing margins versus pursuing growth. We acknowledge that the adoption of SDN will take time, but will shrink gross profit dollars for the networking stack.”

The company’s margins are expected to remain under pressure, and its LT operating margin is projected at 26 percent, implying little EPS growth.

“We maintain our TP of $22 and believe incremental upside for Cisco could now prove more challenging as comparisons become more difficult,” Garcha wrote.