Cisco's Disappointing Outlook Sure To Overshadow Earnings Beat

Cisco Systems, Inc. CSCO opened lower after the company’s first-quarter beat was overshadowed by lower-than-expected second-quarter guidance, hurt by a 12 percent drop in service provider orders.

Buy On The Dip

But, Citi analyst Jim Suva believes the recent weakness is a buying opportunity given potential for shareholder value addition and EPS boost from potential repatriation of cash from overseas and lowering of taxes.

Suva noted that Cisco has 85 percent of its $71 billion of cash overseas and its corporate average tax rate of 22 percent is higher due to its higher US tax rate.

“While we recognize in the next few months there are limited fundamental catalysts for the stock, we estimate if Cisco repatriates its cash and uses 25 percent of it after paying a 10 percent tax, it could reduce the outstanding share count by 10 percent. If the US lowers the corporate tax rate to 15 percent, we estimate an 8–10 percent boost to EPS,” Suva wrote in a note.

Following are the positives and negatives of Cisco’s first quarter results:

• EPS of $0.61 beat consensus of $0.59.
• Gross margins of 65.2 percent above guidance of 63–64 percent.
• Total deferred revenues grew 12 percent.

• Q2 revenues and EPS guidance about 5 percent below expectations.
• Switching revenue fell 7 percent and data center sales slipped 3 percent.
• Cisco noted service provider weakness and Suva wonders “if some of Cisco’s products are misaligned given the new age computing build outs as peer Juniper saw strength.”

Citi's Takeaway

Suva has a Buy rating on Cisco shares, with price target of $34 (down from $35), implying a potential return of 12.6 percent.

At last check, shares of Cisco fell 5.20 percent to $29.94. Year-to-date, Cisco shares have gained 20 percent.