RBC Capital Markets Managing Director - Mark Sue warned in his research note today:
"There are more issues that may compress Cisco's stock multiple than expand it including macro concerns, impact of SDNs, shifts in carrier purchasing power, increasing competition and uncertainty of forward GMs.
"Cisco's multiple has compressed for the past 10-years to its current 8X."
"Cisco may need to continue to grow its earnings to avoid future multiple compression. Its current multiple of 8X may be near its all-time low, but investors should keep in mind that it doesn't mean that the multiple won't compress further.
"We believe Cisco can grow revenues at +3%-5% LT below its reset expectation of +5%-7%, with growth targets higher with a macro tailwind. In our best case scenario, CSCO may reach $22 based on 10 bull-case CY13 EPS of $2.15, while conversely CSCO may reach $11 as investors apply a compressed multiple to 6X to bear-case of $1.76."
Sue concluded:
"Cisco's GMs have declined from peak levels of 70.8% to its current 63.1% and without added software content, GMs may settle long-term at 60%. Investors we talked to are unsure of the long term strategy, the trends in margins, the concentration of purchasing power by the service providers, and the impact of new competitors."
