Cisco: Getting Clobbered But For How Long?

| About: Cisco Systems, (CSCO)

There are times when we watch a particular stock we own get hammered and yet we keep hanging on because nothing has truly changed that much since we purchased it (aside from the share price, ugh). That is what has been happening to Cisco (NASDAQ:CSCO) over the last few months within our Team Alpha portfolio, as well as mine.

I have a stop loss limit that can get hit today if the stock hits $16.25/share. That would be about a 15% "haircut" for me in this stock. I am thinking of taking that stop loss off after I have reviewed the fundamentals.

What The Heck Is Going On?

The usual approach I take with a particular stock that continues to drop like CSCO has, is to clear the cobwebs and just go back to basics. I also take into consideration the headwinds even before I get down to the basics.

This "Market Current" basically says it all in about 50 words or less:

7:33 AM Cisco is downgraded to Neutral from Overweight at JPMorgan, the analysts proving they read the papers by citing weak government and corporate spending. Shares -1.4% premarket.

We all know that government spending will be less and with corporate earnings coming in less than fair, spending could be slashed from the private sector as well. Obviously that is the reason for the JPMorgan downgrade.

The interesting thing to note is that they moved from overweight to neutral, not a sell. Actually they are advising clients to sit on the sidelines for now:

MarketWatch reports that JPMorgan expects the upcoming year to be difficult for Cisco (CSCO ) due to weakness in enterprise and government spending, Europe, and competitive risks. The firm forecasts 2013 Q2 guidance to be below expectations and recommends "moving to the sidelines.

The China economic rebound was not discussed and could be a positive for all stocks with global footprints, including CSCO, as noted in this "Market Current":

Today - Friday, November 9, 6:45 AM Chinese October electricity output grew 6.4% Y/Y, breaking a slowing trend which saw Septembers growth at just 1.5%, the lowest in 2 years. Many analysts prefer to use power-output as a gauge for GDP growth in China as the number is less easily fudged than the national income accounts

If China heats up, I believe the tide will lift many, if not all, boats.

Now Let's Look At The Basics

When I review Fidelity Investments Research, which I feel does a wonderful job, I see an ESS rating of 9.7 out of a possible 10. Folks that is a very bullish outlook by the best analysts rated by Starmine.

The "key" analysts are quite firm:

Firm StarMine
Jefferson Research (NYSE:I) Jefferson Research (i) 94 Buy
Ford Equity Research Ford Equity Research (i) 81 Buy
EVA Dimensions EVA Dimensions (i) 69 Buy
Standard & Poor's Equity Research Standard & Poor's Equity Research (i) 65 Outperform
GMI GMI (i) 58 Neutral
Thomson Reuters/Verus Thomson Reuters/Verus (i) 57 Buy
Columbine Capital Services Inc. Columbine Capital Services Inc. (i) 54 Outperform
Ativo Research Ativo Research (i) 50 Neutral
Zacks Investment Research, Inc Zacks Investment Research, Inc (i) 32 Neutral
Ned Davis Research Ned Davis Research (i) 20 Buy
Market Edge Market Edge (i) 8 Neutral
Click to enlarge

Out of 26 current analysts, there are zero underperforms, there are 18 "outperforms" or "buys", and 8 "neutrals" or "holds". Now either all of these analysts are out of their minds, OR an investor like me is being told NOT to run and hide!

Then we look at the basic fundamentals.

  • Earnings growth YOY for last quarter of 63%.
  • Projected EPS growth for next year of over 7.10%.
  • Revenue growth of 4.5% last quarter YOY.
  • Book value increase of over 13%.
  • Gross margins of 66%. EBITDA margins 0ver 28% in an industry that has a 19.9% margin.
  • A dividend payout ratio of just over 18%, which could support even greater dividend growth at some point.
  • A 3.4% dividend yield currently.

On November 13th, Cisco will report its first quarter results for 2013 and estimates have come in at $.46/share for earnings, and $11.8 billion in top line revenues (a 4.75% increase).

My personal opinion is that this quarters numbers will be okay. If not, we have 26 analysts who will look like complete fools. Of course the forward guidance and the conference call will be the real indicator in this entire scenario.

If the forward guidance is dismal (more than just lowering guidance), then I will need to re-evaluate. Also in play is the fiscal cliff issue. If by this afternoon there is solid positive headway, then we could see a strong rebound in all stocks including Cisco.

For now, I am holding, and so is Team Alpha. What are YOUR opinions?

Disclosure: I am long CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.