Cisco Systems (CSCO) reports Q1 earnings on May 6th. Citi expects results to be largely in line. In the near term, Citi expecs shares to be “range-bound between $23-25 levels.” But what’s more interesting is that Citi is calling for a “fundamental bottom owing to macro-related softness” in the July quarter:
Since our upgrade, we have been calling out the July quarter as the fundamental bottom, owing to macro-related softness, seasonality from Europe, difficult year-year compares and a likely temporary disruption for China in front of the Olympics.
That’s a gutsy call. If the economy continues to soften as many expect it might, consumers will retreat, profits will fall, and capex (on which CSCO is dependent) will fall along with them. Citi is betting on strong results in emerging markets, which might offset US macro headwinds. Either way, Citi maintains its Buy rating and $27 12-month price target (which is a whopping $2 above the current price):
We expect an in-line quarter at ~$9.7B and $0.36. The tone for July is expected to be continue to be cautious, with guidance expected to be in a range from our $10.2B (+8%) to $10.4B (+10%) and EPS from our $0.37 to $0.38. Consensus stands at $10.3 and $0.39…
Although Cisco’s prior reset arguably captures much of the macro weakness in the US, July carries incremental challenges as it relates to an April pull-in of orders from China ahead of the Olympics as well as further deterioration from Europe. Given Cisco’s propensity for conservatism, we expect this to translate to guidance for one more quarter of Y/Y deceleration. At the same time, Cisco shares have appreciated 10% since the recent lows of April 15th, back to ~16.5x our NTM EPS (1.2 vs. S&P). While remaining positive on a 12-mth view, this sets the stage for a likely pull-back over the near-term.
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