Why I Expect To Buy Cisco Shares For $15 Or Less

| About: Cisco Systems, (CSCO)

Even though earnings season is just getting started, a number of high-profile companies have begun to issue profit warnings and guidance that is adding concerns and major downside risks for investors, in an already jittery market. The warnings are coming from a range of industries from apparel makers to car makers to chip makers. The reasons why companies are seeing weaker than expected results include the recession in Europe, a slowdown in China, and weakness in the United States. Another major issue that some investors appear to just be getting more awareness on is that the strength of the U.S. dollar and weakness of the euro is starting to really bite into profit margins for multinational corporations.

While the current market weakness and heightened risks for earnings misses and disappointing guidance is of concern, it is also a potential buying opportunity when high-quality stocks drop. Investors should be thinking about buying solid companies for the long-term, but in this current market and economic environment, it makes sense to wait for and buy on dips. I expect many tech stocks to drop when earnings and guidance are out and one stock that could be poised to give investors a better buying opportunity is Cisco Systems, Inc. (NASDAQ:CSCO). Here are some reasons why investors should consider anticipating a drop in the stock and the buying opportunity it presents in the long-run:

1. Analysts at Stifel Nicolaus recently cut estimates and the price target for Cisco citing weakness concerns from Europe and other areas. Revenue targets for 2012 were reduced to $45.8 billion from $46 billion, with full-year earnings estimates of $1.84 per share. Estimates for 2013 were reduced from $1.95 to $1.90 per share and the price target was reduced from $27 to $23 per share.

2. Other major tech stocks have recently warned on earnings. Advanced Micro Devices (NYSE:AMD) recently stated it is seeing a big shortfall in revenues for the second quarter. Analysts were expecting sales of $1.63 billion, but the company now expects $1.41 billion in revenues. Applied Materials (NASDAQ:AMAT) and Acme Packet (NASDAQ:APKT) also recently warned of weaker than expected sales. In the latest sign of weakness for this sector, Alcatel-Lucent (ALU) just announced it would post a second quarter loss due to reduced demand for its products. This company competes directly with Cisco in some areas, and this bodes poorly for the industry. Alcatel cited weakness in China and other areas which confirms the global slowdown story.

3. For the first quarter of 2012, Cisco reported decent results, but the poor guidance even at that time, contributed to a significant decline in the stock after results were reported. An article that summarized first quarter results and guidance should remind investors of the downside risks that exist for second quarter results; it stated:

Investors instead fixated on a sobering forecast for the current quarter from Cisco CEO John Chambers. He attributed the grim outlook to skittish customers who are waiting longer to close deals and spending less money because of growing concerns about the economy, particularly in Europe and India. "We are still in an uncertain environment economically," Chambers told analysts in a conference call.

The debt crisis and economy in Europe has only become worse since the last quarter, and because new weakness has appeared in U.S. and China, it seems likely that guidance for the rest of the year has even less visibility now and will remain weak. Also, considering that the "Fiscal Cliff" is looming as an increasing risk for the rest of 2012, corporate spending in the U.S. could see further deceleration. Since mandated budget cuts are likely to be triggered around the end of 2012, government spending on information technology providers like Cisco could also be cut.

With all the recent earnings and guidance warnings, very limited visibility with the global economy, and due to the fact that Cisco shares dropped significantly after results were released last quarter, it seems reasonable to be prepared for another decline and a better buying opportunity in Cisco. The shares were trading around $20 before earnings last quarter and then dropped to about $16. While the decline might not be as significant this quarter, negative results and guidance could easily bring the price down to $15 per share, or less.

Key Data Points For Cisco From Yahoo Finance:
Current Share Price: $16.09
52-Week Range: $13.30 to $21.30
Dividend: 32 cents which yields 2%
2012 Earnings Estimate: $1.84 per share
2013 Earnings Estimate: $1.91 per share
P/E Ratio: about 9 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours.