Cisco (CSCO) Stock Down 11% on Revenue Miss and Light Forecast, Citi Says Results Justified Their Street-unique Sell Rating

May 19, 2022 7:55 AM EDT
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Price: $43.06 -1.62%

Rating Summary:
    29 Buy, 23 Hold, 1 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 9 | Down: 13 | New: 33
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Shares of Cisco Systems (NASDAQ: CSCO) are down more than 11% in premarket trading Thursday after the company warned investors that further lockdowns in China and supply chain constraints could weigh on sales growth in the current quarter.

Cisco reported Q3 adjusted EPS of 87c, up from 83c in the year-ago period and just above the consensus estimates of 86c per share. Revenue came in at $12.84 billion, up 0.2% YoY and missing the consensus projection of $13.34 billion.

The adjusted gross margin stood at 65.3%, compared to 66% in the year-ago quarter and the analyst consensus of 64.3%. Cisco generated $9.45 billion in product revenue, up 3.4% YoY and also below the estimates of $9.79 billion.

For Q4, Cisco expects adjusted EPS in the range of 76c to 84, while analysts were looking for 92c per share. The company expects Q4 revenue growth to be down from -1% to -5.5%, compared to the analyst expectations of +5.7% growth. Adjusted gross margin in the fourth quarter is expected to range between 64% and 65%, while analysts were expecting 64.8%.

Cisco expects FY revenue growth in the range of 2% to 3%, down from its previous forecast range of 5.5% to 6.5%, and compared to the analyst estimates of 6.05%. Adjusted EPS for the full year is expected in the range of $3.29 to $3.37, down from $3.41 to $3.46, and below the analyst consensus of $3.44 per share.

Cisco said its exit from Russia cost the company $200 million in revenue. Historically, Russia represented roughly 1% of Cisco’s sales, the company added.

“We continued to see solid demand for our technologies and our business transformation is progressing well,” said Chuck Robbins, chair and CEO of Cisco. “While Covid lockdowns in China and the war in Ukraine impacted our revenue in the quarter, the fundamental drivers across our business are strong and we remain confident in the long term.”

Citi analyst Jim Suva lowered the price target on Cisco to $40.00 per share from $45.00 and reiterated a Sell rating. Citi is the only firm (out of 29 active sell-side) with a Sell rating on Cisco.

“The investor pushback on our rating has been meaningful. While we do NOT expect Cisco to reduce its dividend, we do expect the company to materially increase its stock buyback activity as the company has $17.6 billion remaining in its stock buyback program. We also expect consensus numbers to materially be revised lower and highlight that y/y sales comparisons become more difficult in the quarters ahead. Whether consensus will go as low as our forecast is yet to be seen. At some point we also expect Cisco to remove or reduce its long-term guidance for F21-25 sales CAGR of +5% to +7% as we believe the supply chain simply will not support such growth,” Suva justified the Sell rating.

BofA analyst Tai Liani cut the price target to $52.00 from $62.00 as results showed decelerating order growth and weak guidance. Still, the analyst remains Buy-rated as:

“1) We believe management will provide 4-6% FY23 revenue growth guidance next quarter, supported by $32bn in client commitments and recent price increases. 2) We expect better margins on price increases and cost controls. 3) We believe management will aggressively buy back stocks utilizing its $17bn authorized plan. 4) We believe the valuation is attractive, trading after-hours at about 10.7x EV/FCF, taking the stock back to the lows of COVID eruption in 2020 and back to 2017 levels,” Liani told clients.

By Senad Karaahmetovic



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