Drexel Hamilton Chimes in on Cisco Systems, Inc. (CSCO) Following Strong 1Q:17 Print But Weak Guidance

Cisco Systems, Inc. (NASDAQ:CSCO) shares are descending 5% despite delivering what Drexel Hamilton top analyst Brian White praises as a “strong” fiscal first quarter of 2017 print with “exceptional” margin performance. However, the analyst points to the network giant’s management’s guidance for the second quarter as “soft,” which might be the reason investors became cautious on the stock.

Yet, one person’s “November rain sell-off” is another’s “buying opportunity” and therefore, the analyst reiterates a Buy rating on shares of CSCO while slightly pulling back on the price target from $37 to $36 price target, which represents a 20% increase from where the stock is currently trading.

For the quarter, CSCO sales reached $12.35 billion, beating the analyst’s forecast of $12.28 billion and just above the Street’s $12.34 billion. Pro forma EPS of $0.61 also outperformed estimates, with both White and consensus calling for $0.59. “Cisco executed extremely well in the margin department with operating margin reaching the highest level since 2Q:FY05. Operating margin of 31.6% in 1Q:FY17 handily beat our 30.4% estimate,” the analyst adds.

White expresses, “Cisco highlighted a challenged macro environment but was particularly concerned about trends in its service provider business that experienced a 12% YoY decline (vs. down 5% in 4Q:FY16) in product orders.” On this “weakness,” the company’s product orde4rs fell by 2% year-over-year this quarter.

For next quarter, CSCO anticipates sales will dip to 4% year-over-year, or an estimated $11.51 billion, which falls short of consensus expectations for $12.16 billion, with pro forma EPS of $0.55 to $0.57 underperforming the Street’s projections of $0.59. Subsequently, the analyst is slicing his revenue estimate from $12.16 billion to $11.46 billion. Additionally, the analyst is cutting his pro forma EPS projection from $0.59 to $0.578. For the fiscal year of 2017, White has taken his revenue estimate back from $49.54 billion to $47.60 billion and has tweaked his pro forma EPS expectations from $2.41 to $2.36, with the Street at $2.43.

“Over the past few years, Cisco has struggled with earnings in November, including a sharp sell-off a year ago. Cisco’s soft 2Q:FY17 outlook drove the stock lower in after-market trading; however, we believe Cisco’s 3.4% dividend yield (on aftermarket price), excellent margin execution and a depressed valuation at 10.5x (ex-cash) our CY:17 EPS projection, will support the stock and any weakness will prove short-lived,” White concludes.

As usual, we like to include the analyst’s track record when reporting on new analyst notes to give a perspective on the effect it has on stock performance. According to TipRanks, top five-star analyst Brian White has achieved a high ranking of #81 out of 4,226 analysts. White upholds a 60% success rate and realizes 9.2% in his annual returns. When recommending CSCO, White yields 11.2% in average profits on the stock.

TipRanks analytics demonstrate CSCO as a Buy. Based on 24 analysts polled in the last 3 months, 15 rate a Buy on CSCO, 8 maintain a Hold, while 1 issues a Sell. The 12-month price target stands at $33.42, marking a 12% upside from where the shares last closed.

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