Credit Suisse Keeps Sell-Equivalent On Cisco Before Earnings

• Cisco Systems, Inc. CSCO shares have declined 20.62 percent over the past three months, dropping down almost to their 52 week low at market close on February 5.
• Kulbinder Garcha of Credit Suisse has maintained an Underperform rating on the company, with a price target of $22.
• While the near term outlook appears mixed, Garcha expects the company to report its F2Q16 revenue and earnings more or less in-line with the consensus.

Analyst Kulbinder Garcha mentioned that “near-term IT data points remain mixed largely due to less visibility around service provider spending and global macro.”

Although revenues are expected to remain subdued sector-wide, F3Q16 guidance would benefit from the extra week. Garcha expects the company to generate revenues of $12 billion in F3Q, representing normal seasonality of 2.2 percent quarter on quarter.

Also, there appear to be signs of weak IT spending from “large bellwethers” and resellers of Cisco Systems, which suggests that the revenue expectations for FY16 could have downside.

“Despite potential near-term momentum, we remain concerned regarding the impact of SDN threatening what remains the most profitable part of the IT stack,” Garcha said.

The analyst explained that this would introduce competition at various points in the network and although the impact would take time to become obvious, the threat in terms of shrinking gross profit dollars was very real.

In addition, persisting margin pressures and long term project Oms of 26 percent could lead to low EPS growth, despite continuing share buybacks.