Cisco Earnings Marred By China Uncertainty That Softened Guidance

The U.S.-China trade war complicated analysts’ assessments of Cisco Systems, Inc. CSCO’s fourth quarter and outlook, with little consensus emerging on the stock’s near-term future.

Cisco reported a slight earnings beat but it came with weaker-than-expected guidance that helped send the software maker’s stock tumbling. The mixed report was compounded by broader negative sentiment after the Dow’s biggest decline of the year.

The Analysts

Morgan Stanley’s James Faucette kept an Equal-Weight rating on Cisco, lowering the price target from $51 to $49.

Wells Fargo’s Aaron Rakers kept an Outperform rating and $60 price target on the stock but revised earnings estimates downward.

KeyBanc’s Alex Kurtz lowered the price target on Cisco from $60 to $56 and lowered earnings estimates, but kept an Overweight rating on the stock.

Raymond James analyst Simon Leopold maintained an Outperform rating and raised the target price from $58 to $59.

MKM Partners’ Michael Genovese remained Neutral on the stock and lowered his fair value estimate from $56 to $51.

The Theses

Rakers said that though Cisco management highlighted trade-war driven weakness, the company has proven resiliency and strong positioning in a changing industry.

“Cisco is optimistic on its positioning, specifically pointing out the criticality of its products today vs. in prior years,” Rakers wrote in a note. “We would recommend buying shares of Cisco amid weakness on a slightly below-consensus … guide; we remain positive on Cisco’s operating model resiliency.”

China Is Key

Still, a lot of Cisco’s upcoming story hinges on China. Cisco reported total China revenue was down about 25%, driving the softer guidance.

“We still see Cisco executing on core long-term drivers such as … subscription adoption and see upside to the $56 level - with China trade negotiations as the key near-term variable,” Kurtz wrote.

Leopold also noted concern around a drop in enterprise orders to negative-2% versus 9% in last year’s quarter.

Leopold also cited Cisco’s resilience, however, and “culture that enables it to adapt and evolve,” in saying it's better positioned than many other IT companies.

Strong free cash flow mitigated the uncertainty for Faucette, who noted Cisco was able to grow its applications and security businesses by 11% and 14% respectively, largely through acquisitions.

“Additionally, given these acquisitions have largely been subscription based, they fuel a move towards a more recurring revenue model.”

Genovese said Cisco has strong management that is “controlling what it can.”

“However, we do not like CSCO as an investment when macro conditions are weakening and orders are decelerating,” Genovese wrote. “We suspect year-over-year orders could decelerate further, into negative territory, in the current quarter.”

Price Action

Cisco shares were down 8.3% on Thursday at $46.38.

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Photo credit: Kjetil Ree (Own work), via Wikimedia Commons