Cisco's First-Quarter Earnings Preview: What Wall Street's Saying

NEW YORK (TheStreet) -- Wall Street predicts Cisco (CSCO) to post an in-line quarter when it reports earnings later Wednesday but some analysts are concerned the network equipment maker could temper expectations.

Wells Fargo Securities analyst Jess Lubert lowered estimates for the year given the "potential to see service provider weakness and emerging market challenges continue to impact results over the next few quarters."

Analysts, on average, expect earnings of 52 cents a share for Cisco's October-ended quarter. Revenue is expected to rise 1% to $12.16 billion, according to Thomson Reuters.


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Shares were down 0.50% to $25.02 at midday on Wednesday. Here's what analysts were saying about Cisco.

Brian White, Cantor Fitzgerald (Buy; $31 PT)

Given the challenges highlighted in the U.S. service provider market by various networking vendors this earnings season, we expect Cisco to also experience this weakness. That said, we expect continued strong execution from Cisco and reasonable trends in the enterprise/commercial market. Even if Cisco's sales outlook is soft, the stock is trading at just 8.8x our CY:15 EPS estimate (ex-cash) and holds a 3% dividend yield, while we believe the profit cycle has already reached a trough.

We believe Cisco will meet or slightly miss our 1Q:FY15 revenue estimate of $12.13 billion (FactSet consensus is at $12.17 billion) and at least meet our pro forma EPS projection of $0.52 (consensus is at $0.53). For 2Q:FY15, we are projecting sales of $12.24 billion (consensus is at $12.11 billion) that we believe could prove aggressive, while we are more comfortable with our EPS estimate of $0.53 (consensus is also at $0.53) given Cisco's strong execution.

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Kulbinder Garcha, Credit Suisse (Underperform; $20 PT)

We project F1Q15 revenues of $12.2bn (0.7% y/y, -1.5% q/q) and EPS of $0.51 compared to consensus revenues of $12.2bn and EPS of $0.52. We believe near term IT data points remain mixed and the emergence of SDN will create continued headwinds for the company. We maintain our Underperform and $20 target price.

We currently assume switching revenues of $3.7bn (0.8%/-2.0% qoq/yoy) for F1Q5, showing continuous improvement from previous quarters. We look for continued evidence of the ramp of Nexus 9000 and early deployments of Insieme controller and commentary on the expected inflection in switching revenues. On the routing side we are looking for revenues of $2.0bn for F1Q15 (4.1%/-1.0% qoq/yoy) showing continued improvement from previous quarters helped by product refresh. We expect continued improvement business going further due to weak compares.

Jess Lubert, Wells Fargo Securities (Outperform; $27-$29 valuation range)

We expect Cisco to report relatively in-line FQ1 results, as North American enterprise strength likely offset weak carrier spending and challenges in the emerging markets. We think margins should at least meet our estimates due to stable pricing and a continued focus on managing costs. While we believe Cisco will continue to benefit from healthy enterprise demand, we slightly lower our FY2015/FY2016 EPS estimates from $2.19/$2.33 to $2.16/$2.30 given the potential to see service provider weakness and emerging market challenges continue to impact results over the next few quarters. Despite these concerns, we believe Cisco is likely to return to growth in FQ1 and see top-line acceleration in FQ2, which we view as a potential positive for the stock given what we believe remains an attractive combination of valuation and yield.

With shares of Cisco trading at 11x our CY2015E EPS of $2.22 and yielding 3.0%, we think emerging market and carrier spending risk is already priced in and view enterprise strength and the ramp of several important new products (ACI & NCS) as potential catalysts that may fuel a return to growth and a higher stock price over the next several quarters.

Rod Hall, JPMorgan (Underweight)

We expect Cisco to report a typical 1-2c beat for FQ1 but we believe that the strong USD and worsening global macro could drive weaker guidance and a downtick in outlook commentary from John Chambers. We expect some pickup in switching given the Nexus 9k product cycle though we continue to believe that Cisco will eventually find it difficult to maintain switching margins as ASPs deflate. We also see some risk to the Services line considering continued deterioration of growth there.

Brian Modoff, Deutsche Bank (Buy; $30 PT)

The Nexus 9k Leaf Spine switches and the APIC SDN Software are seeing solid order momentum - mainly refreshing Cat 6k and Nexus switches in the field - which is a +$8B installed base; and 10/40/100GE Leaf Spine switching a +$10B market growing mid-teens. The new SourceFire Security portfolio and 11ac WLAN, similarly, are seeing low double-digit order momentum as well; and we note incremental strength in High-End Campus Switching, Meraki, and Advanced Services as well. All of these datapoints - and our view around improving macro/GDP data (CY15 GDP view for ~3.5%), CxO sentiment, and a growing proportion of recurring revs from Software and Cloud Services positively impacting mix - sum up the basis for our positive outlook and Buy rating on CSCO.

Our slightly cautious view on the Jan Q outlook is mainly due to few points of orders weakness we anticipate from the US carriers in Routing - i.e. for the ASR1k/9k, CRS, NCS, etc [refer to our 10/22/14 Long Winter in Routing note]. Heading into the Apr/Jul Q, we see CSCO starting to sell "architectural plays" to the carriers - i.e. IP/MPLS VPN and Meraki Cloud based Enterprise Networking - helping to build the case for installed base router upgrades.

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TheStreet Ratings team rates CISCO SYSTEMS INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate CISCO SYSTEMS INC (CSCO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, increase in stock price during the past year, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and growth in earnings per share. 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:

  • The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • Despite currently having a low debt-to-equity ratio of 0.37, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 3.10 is very high and demonstrates very strong liquidity.
  • The gross profit margin for CISCO SYSTEMS INC is rather high; currently it is at 64.40%. Regardless of CSCO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 18.20% trails the industry average.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 7.5%. Since the same quarter one year prior, revenues slightly dropped by 0.5%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

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-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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