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Cisco CEO John Chambers criticized by Wall Street analyst for not taking bold action?
Fri, 9/10/10 - 3:54pm    View comments

In my personal opinion, it appears RBC Capital Markets Managing Director - Mark Sue, criticized Cisco CEO John Chambers this morning:

"Cisco may not have taken enough bold proactive actions several years ago to offset its reliance on broader IT spending trends. Market adjacencies have helped nudge Cisco's top line growth rate but may have mostly compensated for the limited growth in traditional segments of switching and routing (~50% of revenues). Our analysis shows an increasing correlation between GDP trends and Cisco's switching and routing revenues. Assuming ~7% growth for switching and routing given the current macro environment and ~9% for services, the remainder of Cisco's business segments may need to grow by ~20%-40% to achieve the company's LT growth target of 12%-17%.

"We're reducing our investment recommendation on Cisco to Outperform. Shares may be attractive for long-term minded investors, trading at 11x our CY11 EPS of $1.80, yet we believe uncertainty related to enterprise network upgrades and the lack of conviction from carrier customers may limit near-term stock appreciation. We would classify the situation as 'steady' at the moment. Our price target adjusts to $26."

Sue continued, "Cisco's healthy GM profile of 64.1% continues to be attacked by competitors seeking entry into the enterprise networking market. We've noted no major shifts in these key markets yet the persistent concerns of margin impact may limit meaningful multiple expansion near-term."

Cisco Market Share Leadership as of Q1CY10 (Jan-Feb-Mar 2010)

Source: Cisco Systems

Sue added, "Cisco will hold its capital markets day next week in San Jose with a discussion on strategy and focus to regain share and accelerate its top line. In our view, aggressive acquisitions, increased risk taking and bolder entry into new markets may enable the company to break from ties to GDP growth. It's not just Cisco but most large-cap tech peers as well, some who are increasingly moving into each others' markets. While smaller acquisitions have worked in the past, Cisco may consider landscape changing deals considering its annual revenue run-rate of +$40B. Cisco has $40B in cash, yet approximately $31B is held overseas, limiting its purchasing power for domestic acquisitions."

Cisco Market Capitalization Leadership as of July 30, 2010

Source: Cisco Systems

Sue concluded, "For the near-term, believe Cisco's quarter is tracking to plan, though October is typically more back-end loaded. Our revenue expectation is $10.7B while our EPS expectation is $0.39. So it's steady as she goes at Cisco with the stock now rated Outperform."

Explanation of RBC Capital Markets Equity Rating System

An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector average.

Ratings

Top Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations.

Outperform (O): Expected to materially outperform sector average over 12 months.

Sector Perform (SP): Returns expected to be in line with sector average over 12 months.

Underperform (U): Returns expected to be materially below sector average over 12 months.

Risk Qualifiers (any of the following criteria may be present)

Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no significant cash flow/financing concerns over coming 12-24 months; fairly liquid.

Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.

Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted.

On April 28, 2010, Mark Sue upgraded his investment recommendation rating on Cisco from Outperform - Above Average Risk to Top Pick - Above Average Risk.

6-Month Cisco Stock Chart Ending September 9, 2010

Source: Yahoo! Finance

On September 10, 2010, Mark Sue downgraded his investment recommendation rating on Cisco from Top Pick - Above Average Risk to Outperform - Above Average Risk.

What's your take, did Cisco CEO John Chambers drop the ball by not being bold enough?

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