Analysts have come out over recent days to support their buy rated behemoth, Cisco Systems (CSCO). As a result, the recently beaten down shares are finding capital support. The stock is up over 3% today and 8.3% this week. Of course, CSCO remains 17% short of its 52-week high. Each of the stock actions, its decline this year and its rise of late have logical support, and so the message each offers should be heeded. The stock is cheap relatively speaking, yes, but serious risks to its near-term growth should keep it retrained. And if CSCO gets too far ahead of itself, the company's CEO will probably rein it in with cautious commentary next week. So then perhaps analysts need to adjust to a new normal valuation for Cisco, whether it be temporary or anchored.
The company's earnings report set for August 15 might be good enough to meet analysts' views for the fiscal fourth quarter ($0.46 in EPS), especially given the courage of recent analyst statements made just a week ahead of the data release. However, I expect those investors leading the shares higher into the report will be reminded of why the stock came down from its spring high of $21.30 soon enough. It's the outlook that will matter here more than quarterly performance, and only a fool would expect John Chambers to be expressing great enthusiasm at the conference call given the global economic outlook.
So even as Goldman Sachs (GS) analyst Simona Jankowski reiterates her buy rating and $24 price target, adding Cisco to her "Conviction Buy List"; and as Piper Jaffray (PJC) analyst Troy Jensen upgrades the stock to "overweight" from "neutral", with a price target of $22, I'm not so sure about buying Cisco here. Jensen noted seemingly better performance than peers Juniper Networks (JNPR) and Aruba Networks (ARUN), based on his study of resellers, but all the tuna in the net get eaten, even the biggest and baddest of the bunch.
Caris & Company's John Slack, who also rates Cisco a buy, notes that projects are coming under increased scrutiny. All seem to indicate strong enterprise demand, but I expect that to slacken as well over the coming year. The analyst retained his rating while cutting his revenue and EPS outlook for the stock. Thus, it is valuation at this point that has the analysts' still on board. In other words, they see it cheap and think it can produce well enough to restore some value. The point is compelling if the stock has priced in a scenario worse than reality. The problem is that the outlook is deteriorating globally; we're not at the bottom of anything here. So, a new normal may be appropriate for Cisco's value, if not for the near-term at least.
However, the value is compelling based on historical comparison. The stock is trading at 9.3X the consensus EPS estimate for 2013 (July). Historically speaking, CSCO has not been much cheaper over the last five years, with its five-year average P/E sitting at 18.7X. Its average low P/E over the last five-years has been 13.9X. You want to buy a stock like that, especially with the business Cisco has. So, I expect it will continue moving higher into the report, or even after it if commentary about the outlook is not too bad.
However, estimates for FY 13 are on the decline, with the consensus down to $1.90 now, from $1.93 just 90 days ago. That sort of trend is not favorable for a value buy; in fact, it's indicative of a valuation trap. Jim Cramer today reportedly supported the stock on CNBC, basing his view on business he sees from telecommunications providers AT&T (T) and Verizon (VZ). However, I feel like people fall into the same trap I use to with this stock, relating its performance to the wonders of broadband and the Internet. The numbers just don't support that kind of enthusiasm though.
In a normal economic scenario, I might agree with the analysts and TV guru at this value. However, what I see developing globally leads me in another direction. At this value, I cannot support anything lower than a hold recommendation nonetheless. The company should preserve capital better than most in its business at this valuation; and given the current growth forecast (though facing possible reduction), it would seem to offer some margin of safety. Thus, Cisco is neither a value buy nor a value trap in my opinion, but a value hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.