We are downgrading Cisco (CSCO) shares from Outperform to Neutral, as the shares have had a great run since the beginning of the year and we believe further upside will likely be limited. The company is a leading provider of IP-based networking products and has very large scale of operations all over the world. It is very well-entrenched in both developed and developing countries.
Driven by improving trends in IT spending, the company reported a very strong fiscal first quarter. Results were a significant improvement over prior quarters, with both revenue and earnings exceeding the Zacks Consensus estimate. Of particular note is the growth in orders, which indicates continued business momentum.
The company also has a very strong balance sheet, with around $31 billion in highly liquid short term investments and another $5 billion in cash. Total debt is negligible and the debt-to-total capital ratio is 28%. Management returns value to shareholders through regular share repurchases and we expect this activity to continue in the foreseeable future.
We have two big concerns regarding the company. The first is the complicated decision-making process, which takes considerable time and effort on the part of management. As a result, response to urgent situations is too slow. The second is the increasing competition and loss of market share.
We are particularly concerned about the proposed merger of Hewlett Packard Company (HPQ) and 3Com Corporation (COMS). Although the combination will take time making inroads into Cisco’s very significant market share, the company’s slow decision-making process could mean extra time to find a solution to the problem and even more time to implement it. Of course, the agreement with EMC is a saving grace.
Read the full analyst report on “CSCO”
Read the full analyst report on “HPQ”
Read the full analyst report on “COMS”
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