Tech stock earnings season continues this week, as Cisco Systems reports earnings Wednesday August 14 for its July quarter. And there are reasons for optimism about the networking equipment giant’s shares.
- P. Morgan analyst Samik Chatterjee pointed out in a research note Monday that the stock is trading about 10% below its 52-week high, pressured by investor concerns about the U.S.-China trade spat, and a nasty earnings disappointment from NetApp (NTAP) that hinted at softening Enterprise IT spending.
But Chatterjee repeated his Overweight rating and $62 price target on the stock, and offered three reasons he thinks the bearish tone on the stock is overdone:
Both of the company’s most direct competitors in networking hardware, Arista (ANET) and Juniper (JNPR), recently reported strong enterprise sector growth.
While the macro economy uncertainty appears to be “elongating sales cycles for large award wins with larger enterprises,” Cisco’s deep customer footprint across a range of small- and medium-size business and enterprise customers will limit the impact on its results, he adds.
And Chatterjee says Cisco’s “accelerating top-line momentum”—driven by product cycles in campus switching and security—as well as a coming product tailwind in Wi-Fi equipment, “will allow the firm to offset macro headwinds.”
For those reasons, Cisco can show top-line acceleration, with mid-single-digit revenue growth going forward, Chatterjee writes. “We believe the recent weakness in CSCO shares offer an attractive entry point,” he writes. The stock trades at 15.4 times earnings on a next 12 months basis, below the market multiple at 16.7 times, despite a “superior medium-term top-line and earnings growth outlook.”
For Cisco’s fiscal fourth quarter ended July 31, Street consensus calls for revenue of $13.39 billion, up 6%, with earnings of 82 cents a share. Cisco’s guidance for the quarter called for revenue growth of 4.5% to 6.5%, with non-GAAP profits of 80 to 82 cents a share.