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Why Cisco (CSCO) Was Downgraded

NEW YORK (TheStreet) --J.P. Morgan downgraded Cisco (CSCO - Get Report) to "underweight" from "neutral," lowering the price target to $17 from $21.

Cisco fell 0.9% to $22 Monday.

The bank's analysts cited weakness in emerging markets as the cause for the downgrade.

"Carrier revenue trends in major emerging markets look likely to weaken further in 2014," the analysts wrote. "Specifically, Indian SPs revenue growth is forecast to decline to 5.3% (2013: 8.2%), Russian SPs to 3.4% (5.3%), Brazilian carriers to 3.8% (4.9%), Chinese carriers to 10.9% (14.6%) and Mexican SPs to remain at ~1%. We believe that these negative revenue trends combined with weak local currencies are likely to drive lower capital spending. We believe Cisco has outsize exposure to these markets."

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Separately, TheStreet reiterates Cisco as a Buy with a ratings score of B. The team has this to say about their recommendation:

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"We rate CISCO SYSTEMS INC (CSCO) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, attractive valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CSCO's revenue growth trails the industry average of 23.6%. Since the same quarter one year prior, revenues slightly increased by 1.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Although CSCO's debt-to-equity ratio of 0.28 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 2.65, which clearly demonstrates the ability to cover short-term cash needs.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Communications Equipment industry and the overall market, CISCO SYSTEMS INC's return on equity exceeds that of both the industry average and the S&P 500.
  • The gross profit margin for CISCO SYSTEMS INC is rather high; currently it is at 65.64%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 16.48% trails the industry average.

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