Analysts weigh in on IT giant Cisco Systems, Inc. (NASDAQ:CSCO) and real estate investment firm ARMOUR Residential REIT, Inc. (NYSE:ARR). Both face economic challenges such as a weak macro environment and declining book value.
Cisco Systems, Inc.
Analyst Jason Ader of William Blair reiterated an Outperform rating on Cisco systems following Q1 2016 earnings release, though he did not provide a price target. The company posted revenues of $30 million last week, marking a 4% year-over-year increase, and earnings of $0.03 per share.
The analyst explains that the company had a good quarter overall. Cisco maintained high U.S. orders, although the company had some routing issues resulting in a narrower than expected growth rate. Related to this, the company gained 200 new customers for its product APIC (Application Policy Infrastructure Controller). The company’s gross margin was better than expected, coming in at 120 basis points above guidance. Ader attributes this to the company’s maintenance of price levels, cost controls, and strong execution.
Despite healthy U.S. figures, management issued weak guidance for Q2 due to the weak macro environment in Asia and slow overall growth. Cisco is currently developing security products which management believes will generate more revenue in the second half of the year. Ader states that the stock will suffer as a result of this weak guidance. However, he believes the company is in a strong financial position and still serves as one of the IT industry’s key players.
The analyst states, “While there will always be puts and takes in Cisco’s business given the product, customer, and geographic diversity, we see a highly profitable and structurally healthy company with a number of upcoming positive catalysts…Ultimately, while we maintain modest growth expectations, we view Cisco as a survivor in a ruthless IT infrastructure landscape, well‐positioned relative to industry trends, and with a clear and shareholder‐friendly strategy.”
According to TipRanks’ statistics, out of the 17 analysts who have rated Cisco in the last 3 months, 11 have rated the stock as Buy, 2 have rated it as Sell, and 4 remain on the sidelines. The average 12-month price target for Cisco is $30.92, marking an 18% upside from where shares last closed.
ARMOUR Residential REIT, Inc.
Analyst Brock Vandervliet of Nomura Holdings reiterated a Neutral on Armour Residential REIT and maintained a $23 price target on the stock after the company posted Q3 earnings. Non-GAAP earnings per share for Q3 were $1.11, exponentially above analyst estimates of $0.18. Although the company has increasing leverage, the analyst believes it cannot sustain this growth “as dollar roll specialness continues to weaken.”
Vandervliet’s main concern for Q3 are declining book values. He attributes this to “losses in the hedge fund portfolio that outweighed MBS price improvement.” This decrease in hedge fund portfolio value was also due to shrinking the company’s 5 and 10 year swap spreads. However, the analyst expects a percentage of the book value lost to be recouped in Q1 of next year.
Despite some positive notes by the analyst, he states that the company repurchased 1.8 million shares last quarter “as valuations remain at historic lows.” Additionally, the company borrowed $100 million through its membership with FHLB Des Moines. In summary, Vanderfliet states that management favors higher earnings and dividends rather than increasing book value.
According to TipRanks’ statistics, 1 analyst has rated ARR in the last 3 months and remains on the sidelines. The average 12-month price target for ARR is $24.50, marking a 21% increase from where shares last closed.