RealMoney Silver - Little Downside Left at CSCO

Little Downside Left at CSCO
By Jay Somaney
RealMoney.com Contributor
2/7/2008 11:24 AM EST

Updated from 9:04 a.m. EST on Feb. 6.

The Cisco (CSCO) Kid issued disappointing guidance of 10% year-over-year growth for the April quarter vs. expectations of 15% year-over-year growth.

John "Cache Boy" Chambers took a lot of investors by surprise by beginning the call fairly confident then laying a big goose egg by saying that the company was seeing a sudden but slight deceleration in American orders and a greater deceleration in European orders.

Further cause of concern were the company's comments that there was also a slight slowing down in orders from emerging markets, which had been a pillar of strength for the Kid thus far.

The weakness in Europe was attributed to the service provider segment and Cisco said that they need another quarter to determine whether the weakness in Europe is a one-off thing or the start of something more meaningful.

The company in-line earnings of 38 cents a share on revenue of $9.8 billion, which was a slight beat.

Like I said in my preview, the stock is at trough levels and could lead to bargain-hunting despite any perception of a slowdown in the near term, which is exactly what you are seeing this morning despite post-market and pre-market reaction.

What is amazing is that the stock is trading at a lower multiple of earnings today than it did back in October 2002, when it traded at $8 and change.

With management having lowered the bar enough for estimates going forward and the worst-case scenario likely priced in given economic headwinds, the Cisco Kid has very little downside left at current levels and at current valuations.

CSCO Preview: Heads or Tails?

The Cisco (CSCO) Kid will report after the close of trading today, and the world will wait with bated breath to see what Johnny "Cache Boy" Chambers has to say on the global tech spending outlook. Last quarter, he basically put the fear of God in techland with his off-the-cuff remarks on corporate spending stateside, which he later tried to rectify numerous times, but the damage was done, and, as a result, Cisco shares are a buck and change away from their 52-week lows.

For Cisco's January quarter, the cheerleaders are at earnings of 38 cents per share on revenue of $9.79 billion. For the April quarter, current Street estimates are for earnings of 39 cents per share on revenue of $10.2 billion. For fiscal year 2008 (ending July 2008), current consensus is for earnings of $1.59 per share on revenue of $40.34 billion. For 2009, the Street is currently predicting earnings of $1.81 per share on revenue of $46.16 billion.

If there is one thing (and only one thing) to watch for it is what Cache Boy says about the state of the U.S. enterprise business. Although, U.S. enterprise accounts for only 13% of Cisco's revenue, for some reason, investors seem to have a hard time getting a handle on that fact, and that is why it is considered the critical factor, if only from a false psychological point of view.

Here are other things to watch and listen for on the press release and earnings call:

growth in small and medium businesses;

emerging markets growth (Europe, Middle East and Africa, and especially India and China);

carrier spending plans going forward, especially foreign carrier growth;

carrier spending on next-generation networks;

public sector business and forecasts going forward;

overall guidance for the April quarter;

operating expenses and operating expense guidance;

capital expenditures and capital expenditure guidance;

stock repurchases in the past quarter and plans going forward;

competitive issues, with competition with Juniper Networks (JNPR) heating up, which could be an issue going forward;

comments on Europe and U.K. (expect U.K. to be weak, but overall, Europe should be okay); and

global market share;

Investors and analysts might also want to ask the following questions:

Cisco's management had said that the company saw big swings in enterprise order cancellations toward late September. Have those cancellations stopped, or has the rate of cancellations improved?

Have the adverse credit market conditions affected the company's commercial business?

With Chambers waxing caution on the prior quarter's call, well ahead of the subprime issue becoming the talk of the town, it is hard to imagine him not being cautious again given the fact that the subprime issue has affected virtually every sector from a spending point of view.

On the flip side, however, given trough-level multiples and Europe, Middle East and Africa, and especially India and China, showing no signs of slowing down, Cache Boy only needs to say a few things that are only mildly positive to see a smallish rebound in the shares.

Having said that, I believe the risk/reward is a coin toss given the swirling crosscurrents (economic outlook, subprime crisis, future interest rates, global markets roiling, massive amount of uncertainty, etc.) at the moment.

Good luck whichever way you are playing The Cisco Kid going into the call, good guy or dark-sider.