Argus Raises Cisco Systems' Price Target To $37, Sees 21% Upside

Argus maintained its Buy rating and raised Cisco Systems, Inc. CSCO price target by $3 to $37, implying a potential upside of 21 percent over Thursday's close.

Cisco's push into cloud computing leverages its existing networking and data center investments, and carries less risk than earlier stand-alone expansions into new markets. But, there is also risk if the fragile recovery in equipment demand fizzles out.

"We believe that these risks are offset by the company's extensive relationships with communications equipment buyers, as well as by its technology leadership, aggressive but prudent business development program, and strong balance sheet," analyst Jim Kelleher wrote in a note.

In addition, CEO Chuck Robbins said momentum in security, collaboration and data center, software and services content in all businesses is offsetting slow growth in the core businesses of routing & switching.

Cisco, which reported fourth quarter results above Street view, plans to reduce its workforce by 7 percent (about 5,500 jobs), with most of the cuts focused on routing & switching, and to reinvest in faster-growing businesses.

For the first quarter, Cisco expects adjusted revenue to be up 1 percent to down 1 percent on a year-over-year basis, implying revenue in the $12.15-$12.40 billion range. The Street had been modeling a 1-2 percent decline in adjusted revenue. Cisco projects first quarter non-GAAP EPS of $0.58-$0.60.

Meanwhile, Kelleher cut his FY17 non-GAAP earnings projection to $2.50 a share from $2.51, and set an FY18 forecast of $2.61.

Shares are up 13 percent year-to-date in 2016, compared to a 2 percent year-to-date gain for the Argus communications equipment peer group.

"Despite their recent outperformance, CSCO shares continue to trade at a discount to historical price-based comparable valuations, and particularly to DFCF valuation," Kelleher noted.

CSCO trades at 12.2-times Argus' FY17 non-GAAP EPS forecast and at 11.7-times FY18 projection. The two-year average forward P/E of 12.0-times now exceeds the five-year (2012-2016) average multiple of 10.8.

At time of writing, shares of Cisco were up 0.16 percent to $30.53.