Communications Equipment: Goldman Turns Cautious, But Bullish on Cisco

Goldman Sachs has turned cautious on the communications equipment sector.

Goldman’s Simona Jankowski is assuming coverage of some companies in the group, and in the process lowering the firm’s view of the sector to Neutral from Attractive. (Jankowski takes over from Brantley Thompson, who is going to the buy side.) She picks up coverage of Cisco (CSCO) with a Buy rating, and adds the stock to the firm’s Conviction List; she also picks up Juniper Network (JNPR), and cut her rating to Neutral from Buy. She’ll also be covering Motorola (which is currently rated) and Buy-rated Qualcomm (QCOM) and Research in Motion (RIMM).

Her colleague Thomas Lee picks up Aruba Networks (ARUN), and downgrades it to Sell from Neutral; he likewise launches coverage of Starent (STAR), and downgrades to Neutral from Buy. He also picks up Neutral-rated Netgear (NTGR) and Powerwave (PWAV).

The analysts cut price targets for many of the stocks.

“In the long-term our coverage universe offers multiple opportunities for out-sized growth,” Jankowski writes, “given a multi-year secular trend of accelerating bandwidth demand that is driving multiple product cycles around IP network convergence, 3G handsets and wireless data.” But she also cautions that the sector faces softening near-term fundamentals, and a median P/E at a 27% premium to the S&P 500.

Here are a few brief comments from the two analysts on each of the companies:

• Acme Packet: Price target cut to $8 from $10.
• Aruba Networks: Price target to $4.50 from $5. “Aruba faces considerable amount of risk during an economic downturn,” Lee writes. “Customers could increasingly choose Cisco over Aruba, given Cisco’s attractive bundled pricing andthe perceived higher risk of going with a smaller vendor during uncertain economic times.”
• Cisco: Raised target to $29 from $28. “With the recent reset of the Street’s estimates for Cisco, we believe the market will refocus on the solid earnings growth story, allowing the multiple to expand to more fairly reflect Cisco’s above-average growth,” Jankowski writes.
• Juniper: Price target chopped to $25 from $37. “We believe the bar is set too high for the stock in the near term, given its premium valuation and investors’ high expectations for further upside to estimates,” she writes. Jankowski cut her 2008 non-GAAP EPS estimate to $1.07, from $1.13; for 2009 she goes to $1.32, from $1.45.
• Motorola: Jankowski says that “continued deterioration in Motorola’s handset business is likely to continue into 2008-2009, given the lack of new compelling products on the horizon.”
• Netgear: Price target cut to $21 from $27.50. Writes Lee: “We remain cautious in the near term as we head into seasonally the weakest part of the year, which we believe could be exacerbated given potential macro headwinds, particularly around consumer spending.”
• Powerwave: Price target cut to $2.30 from $4. “Given that the company is still in a restructuring phase combined with deteriorating trends in the wireless infrastructure market, we do not believe the company should be trading at a significant premium to its peer group,” Lee writes.
• Qualcomm: Price target to $44 from $58. The Goldman analysts write that the current valuation of the stock reflects “an overly negative” view of the outcome of its licensing dispute with Nokia.
• Research In Motion: Price target to $120, from $125. The Goldman analysts assert that the company can expand its market share through penetration of overseas markets the “prosumer” segment.
• Starent: Price target to $14 from $23. “Given the current macro headwinds and investors’ valuation sensitivity, we have a stronger bias toward large cap stocks such as Cisco, Qualcomm and Research in Motion,” Lee writes. And I like that part: “With that said, Starent is our favorite Neutral-rated stock.” (That’s like picking out your favorite least favorite ice cream flavor.)