RealMoney Silver - Cisco Is a Good Buy at Current Levels

Cisco Is a Good Buy at Current Levels
By Jay Somaney
RealMoney.com Contributor
11/8/2007 11:42 AM EST

Updated from 9:40 a.m. EST on Nov. 7.

Cisco Systems (CSCO) beat the numbers by a penny as I had expected, but guidance was muted due mainly to weak enterprise spending in the Americas.

Cisco reported revenue of $9.6 billion and earnings of 37 cents per share vs. consensus of $9.54 billion and 36 cents per share. The gross margin was 65.6%, up from 65.2% in the prior quarter. The operating margin was 29.6%, up from consensus of 29%. Cash flow was a massive $3.1 billion. The Kid is a big cash machine, indeed.

Router revenue was up 18% year over year, to $1.9 billion, and flat quarter over quarter. Switching revenue was up 8% year over year and up 2% quarter over quarter, to $3.3 billion. Advanced technologies was the star of the quarter, with revenue of $2.4 billion, up 27% year over year and up 7% quarter over quarter. Service revenue was up 24% year over year and 3.2% quarter over quarter, to $1.5 billion.

U.S. orders were up 13% year over year, emerging markets were up 35% year over year, Europe was up 20% year over year, and Asia Pacific was higher by 18%, with China up 19% and India up 50% year over year.

The company is guiding the January quarter to total revenue of $9.8 billion, up 9% year over year and mostly in-line with consensus. The gross margin will be in the 65.5% range, a bit higher than the 65% estimate. OpEx will be 36% of revenue. Other income has been guided to $225 million. Tax rate expectations are 24%. The share count is expected to be flat on a diluted basis. Cash flow will be $2.4 billion.

The numbers were good but not good enough, as I stated in my preview. Cisco needed a quarter and guidance like the one the comapny gave us in August, and it was not able to do so given the sharp slowdown in the company's U.S. financial services business - albeit, that vertical accounts for under 5% of total revenue. In addition, management said that there was a pause in enterprise spend as the company is just at the start of a new product cycle (launching this week) that could lead to growth re-accelerating in the coming quarters.

I think Cisco is a good buy at current levels. The stock could easily work its way to $35 once the hand-wringing is behind us.

We shall see.

Cisco Preview: Guidance Could Be Flat

This evening after the close of regular market trading, Cisco Systems (CSCO) will report earnings for its quarter ended Oct. 31.

The Street expects earnings of 36 cents per share on revenue of $9.54 billion for the October quarter. For the January quarter, current Street consensus is for earnings of 38 per share on revenue of $9.81 billion. For fiscal 2008 (ending July 2008), current estimates are for revenue of $40.43 billion and earnings of $1.57 per share. For 2009, the Street currently expects revenue of $46.63 billion and earnings of $1.84 per share.

Here is what to look for in the report and listen for on the call:

Comments on the supply chain.
Demand environment going into 2008.
Demand for company's products in the fast-growing BRIC countries (Brazil, Russia, India and China).
How the service provider business is doing.
An explanation on the company's WiMAX strategy, especially given the Navini Networks acquisition.
How the enterprise business is doing.
Chambers' comments on his four theaters (Asia-Pacific, EMEA, Europe and Americas).
How the IP networks segment is performing for the company, especially given strong demand trends in VoIP, security, storage, wireless and video.
Spending by wireline and wireless carriers and cable operators, given the convergence (voice, data, video and wireless) that the IP network demands.
Book-to-bill (the Street has it at 1).
Margins (expectations of around 64% to 66% at the gross level).
Guidance (looking for flattish).
Cash flow (expectations of $2.4 billion to $2.6 billion).

I believe the Cisco Kid could beat by a penny on the bottom line but will do more than leave guidance unchanged. Given the rise in the stock since the company's last report in July, a similar guide up would be needed this time around as well for the stock to make the next step.

Good luck, whichever side you are playing Cisco from, good guy or dark side.