Cisco Systems (CSCO) Upgraded to Outperform at Credit Suisse, Other Analysts Raise PTs Following Bullish Investor Day

September 16, 2021 6:37 AM EDT
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Price: $56.18 --0%

Rating Summary:
    32 Buy, 23 Hold, 1 Sell

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    Up: 9 | Down: 10 | New: 13
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Shares of Cisco Systems (NASDAQ: CSCO) are up 1.3% in pre-open Thursday after multiple analysts raised their price targets on the stock following a positive Investor Day.

More importantly, Credit Suisse analyst Sami Bedri upgraded to Outperform from Neutral and raised the price target to $74.00 per share from the prior $56.00.

The computer networking giant projected that revenue will grow between 5% and 7% over the next four fiscal years. Analysts were calling for a 6% growth rate in 2022, before decelerating.

Earnings per share (EPS) are expected to grow at the same rate, Chief Financial Officer Scott Herren told analysts and investors.

Bedri notes that the current investor sentiment is cautiously optimistic, but he argues the “cautiousness will abate as CSCO executes on its LT guidance while ramping its recurring revenue plans (software, subs. etc.).”

“A key area of investor discussion ahead of the Investor Day was the quality of the reported F4Q21 product order growth of +31% y/y, given the magnitude of growth and suspicion of double ordering. Now, there is clearly a higher level of quality embedded in the product orders than investors initially appreciated, supported by mgmt.’s above consensus revenue growth CAGR of 5-7% through FY25. We believe that it is unlikely that there has been double ordering activity if NT and LT growth is as strong as mgmt. has guided. With the product order debate put to rest, we believe there are more durable trends in play (routing, Silicon One, etc.), supporting our incrementally more positive view of the overall company,” the analyst said in a note sent to clients.

Bedri also expects larger returns for shareholders than the guidance suggests, with robust FCF likely to be used for buybacks.

“We forecast ~64% of FCF going towards buy-backs and dividends, which is slightly above Mgmt. guidance of 50%+. Our FY22/23 EPS growth is 7.0%/6.8% versus rev. growth of 6.2%/5.6%, respectively. Crediting CSCO with strong LT guidance and a transitioning software mix, we value CSCO on 20x our FY23E EPS, higher than direct sector peers JNPR/FFIV. Potential risks include reliance on suppliers, technological disruption and competition,” the analyst concluded.

KeyBanc analyst Steve Enders raised FY23 estimates on the updated mid-term outlook but he remained Sector Weight “as CSCO trades at high end of historical range at 17x NTM PE.”

“Cisco's analyst day provided a renewed focus on its transition to a software/sub model with 44% of rev now coming from recurring revenue. Cisco sees this mix growing to 50% of rev by FY25 and helping drive sustained 5-7% revenue growth (FY23 consenus growth of 3.4%) led by subscription product growing at a 15-17% CAGR - yet, CSCO is guiding to just 5-7% EPS growth despite continued commitment to buybacks, suggesting some incremental investments,” Enders wrote in a client note.

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