JPMorgan Sees Cisco's Overarching Fundamentals As Weak, Consistent With Macro Deterioration

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  • Shares of Cisco Systems, Inc. CSCO have been volatile over the past year and down 17 percent since January 10, 2016.
  • J.P. Morgan’s Rod Hall reiterated an Underweight rating on the company, with a price target of $17.
  • Weak macro trends are expected to be an incremental headwind for the company, in addition to a weak Switching cycle, Hall mentioned.

    Cisco reported robust 2Q16 results and announced a better-than-expected dividend of 8 percent but guided to F3Q revenues short of the J.P. Morgan estimate.

    The company’s APJ product orders were up 17 percent year on year in F2Q, compared to the 9 percent year on year growth in F1Q and -1 percent in F4Q15. There was a 3.7 percent year on year decline in Cisco’s switching revenues for the quarter, as against a 4.6 percent year on year increase in F1Q. The company attributed the weakness to deteriorating macro conditions.

    Cisco’s F2Q Enterprise orders declined 2 percent year on year, as compared to a 3 percent year on year decline in F1Q.

    “However, Service Provider orders grew 5 percent Y/Y in FQ2, only slightly down from 6 percent Y/Y in FQ1 consistent with solid Routing revenue in FQ2 that was 8.1 percent ahead of our forecast,” the JP Morgan report mentioned.

    The company guided to F3Q revenue growth of 1-4 percent year on year, 3.3 percent below the estimate, which was adjusted upward for an extra week of business in the quarter. Cisco mentioned that they have assumed $250-275 million of revenue for the extra week or about 2 percent of additional growth.

    Analyst Rod Hall expects the weak macro trends to continue and act as an incremental headwind to an “already slowing Switching cycle.”

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Posted In: Analyst ColorShort IdeasReiterationAnalyst RatingsTrading IdeasJ.P. MorganRod Hall
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