By Wallace Witkowski
Cisco Systems Inc. could benefit from a thawing of enterprise spending as more businesses resume projects that got postponed because of the COVID-19 pandemic.
When Cisco /zigman2/quotes/209509471/composite CSCO -2.00% reports fiscal third-quarter earnings on Wednesday afternoon, investors and analysts will be examining its outlook to determine if the networking company’s executives expect that same dynamic.
While cloud data centers, online-conferencing tools and cybersecurity companies have benefited from the work-from-home and shelter-in-place trends spurred by the COVID-19 pandemic, Cisco’s large, on-premises network-appliance business has been held back because many businesses held off purchases for their on-prem networks. That’s especially true of small-to-medium-sized businesses, or SMB, which make up nearly a third of Cisco’s sales.
“Commentary from checks largely foots with our view that Cisco will see a benefit as enterprises return to projects that have been pushed off and as outsized public sector funds are spent,” Morgan Stanley analyst Meta Marshall wrote recently. “Leading the way for Cisco is activity related to WiFi at the edge, benefiting switching demand in tandem, and security-led activity at the core.”
Marshall called Cisco “an underappreciated return-to-work/future-of-work beneficiary,” and has an overweight rating and $57 price target on the stock.
Analysts expect to see a spring thaw in that area, however, as more businesses announce back-to-work plans as mediocre March channel checks gave way to slightly better ones in April. Cisco could solidify that view Wednesday.
What to expect
Earnings: Cisco on average is expected to post adjusted earnings of 82 cents a share, up from 79 cents a share in the year-ago period, according to a FactSet survey of 27 analysts’ estimates. Cisco forecast 80 cents to 82 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 84 cents a share.
Revenue: Wall Street expects revenue of $12.57 billion from Cisco, according to 22 analysts polled by FactSet, up from $11.98 billion reported last year. Cisco predicted a revenue gain of 3.5% to 5.5% from a year ago, or $12.4 billion to $12.64 billion. Estimize expects revenue of $12.55 billion.
Cisco is expected to report $9.06 billion in product sales, with infrastructure platforms accounting for $6.76 billion of that, applications making up $1.44 billion, and security accounting for $859.9 million, according to FactSet data. Services are estimated to account for $3.49 billion in Cisco sales.
In its February earnings report, Cisco reported sales topped Wall Street estimates, buoyed by infrastructure sales that made up for shortfalls in non-infrastructure sales .
Stock movement: In Cisco’s fiscal third quarter, shares rose 13.7%, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.58% — which counts Cisco as a component — rose 9.3%, the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.31% gained 8.9% and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.92% advanced 3.1%.
What analysts are saying
Raymond James analyst Simon Leopold, who has an outperform rating and hiked his price target to $55 from $50, sounded “a note of caution,” and thinks that supply chain constraints may get blamed if Cisco falls short.
“Most names we cover did not report sales misses because of supply-chain constraints, but some felt pressure on gross margin,” he said.
“We think the April quarter meets expectations; supply chain constraints and a more gradual recovery dampen prospects,” Leopold said. “Checks at resellers and distributors revealed weak trends through March with modest improvement in April. Supply chain checks did not reveal challenges.”
MKM Partners analyst Fahad Najam, who has a buy rating and a $61 price target on Cisco, said he sees revenue growth to exceed expectations out until 2022 as economies recover from the COVID-19 pandemic and public cloud centers build out.
Acknowledging that tech stocks are trading at high valuations, Najam call Cisco “the ultimate ‘flight to quality’ stock within our coverage.”
“With a dividend yield of 2.8% and solid free-cash-flow generation, we continue to see the drivers of Cisco’s long-term operating model as intact,” Najam said. “Moreover, we see Cisco should now begin to benefit over the long-term from increasing exposure to Hyperscale Cloud data center build-outs and growing software-driven solutions.”
Of the 28 analysts that cover Cisco, 16 have buy ratings and 12 have hold ratings, with an average target price of $55.