On Monday CSCO was downgraded to underweight from an already cautious neutral rating by JPMorgan's Rod Hall. The cut is based on the expected reduction in the company's emerging markets business and the impact of "software-defined networking" (SDN). The price target was reduced to $17 from $21.
"We consider EPS impacts for Cisco against both our current 2014 earnings model and a possible 2017 model. We also consider two main scenarios which both involve 85% data center conversion to 'bare metal' hardware," he wrote. "In the worse of these two we add the assumption that 30% of campus switching also moves to bare metal. Across all of these methods calendar year EPS ranges from $1.41 to $1.82 in 2014 and from $1.66 to $1.90 in 2017. Our central case scenario outputs EPS of $1.67 near the bottom of this range. While our range is relatively wide we would point out that it implies negative EPS growth over the next few years for Cisco."
It appears CSCO fell behind the eight ball in its areas of core competencies. This is likely to challenge Cisco's dividend yield, which currently equals a payout ratio of at least 36%. The following five-year chart using same metrics as the GOOG chart above will help illustrate why CSCO receives my ignominious rating, even though I'm still long the stock.
CSCO data by YCharts
At the time of publication the author had positions in GOOG, AAPL and CSCO.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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