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Cisco Systems (CSCO) Shares Attractive at Current Levels

 November 14, 2012 10:26 AM

(By Balaseshan) FBN Securities analyst Shebly Seyrafi said Cisco Systems Inc. (NASDAQ: CSCO) shares are especially attractive at current levels following the company's first quarter results. The brokerage retained its "outperform" rating with $25 price target.

Earnings for the first quarter were $2.09 billion, or $0.39 per share, up from $1.78 billion, or $0.33 per share, last year. Adjusted earnings per share (EPS) rose to $0.48 from $0.43, while the Street predicted $0.46. Sales increased 6 percent to $11.88 billion, beating market expectations of $11.77 billion.

For the second quarter, the company expects EPS of $0.47 to $0.48 and revenue growth of 3.5 percent to 5.5 percent, implying $11.9 billion to $12.2 billion in revenue. Consensus estimates call for EPS of $0.48 on revenue of $12.07 billion. The company beat revenue and EPS expectations, and is guiding revenue and EPS roughly in-line with expectations.

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However, Seyrafi believes that CSCO is being conservative (particularly in gross margin). In products, switching and routing revenue continue to decline, but wireless and data center continue to post very strong growth.

Meanwhile services continues to grow at a double-digits percentage, the analyst noted. The bottom line is that CSCO did not disappoint on the report and the guide, and its margin performance was impressive. Therefore, he thinks that there will be some capitulation by the bears today.

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With $5 per share of net cash (resulting in price-to-earnings excluding cash of only 5.5 times) and a dividend yield of over 3 percent ($0.56 per year annual dividend), shares are especially attractive at current levels. The only other real blemishes were the flat product order growth and the product book-to-bill being slightly below 1.0.

Seyrafi regards CSCO's strong wireless revenue (up 38% year-over-year) as indicative of strength in WLAN overall and view this data point as a positive for Aruba Networks Inc. (NASDAQ: ARUN), which reports Thursday evening.

The analyst said the weakness in NGN routing from service providers in EMEA, however, is an incremental negative for Juniper Networks Inc. (NYSE: JNPR). Telepresence was down in the mid-teens percentage, and he views this as an incremental negative for Polycom Inc. (NASDAQ: PLCM).

The brokerage lowered its 2013 EPS estimate for Cisco to $1.99 on revenue of $48.58 billion from $2.01 on revenue of $49.24 billion, and its 2014 estimate to $2.15 on revenue of $51.09 billion from $2.18 on revenue of $51.80 billion.

CSCO is trading up 6.29 percent at $17.91 on Wednesday. The stock has been trading between $14.96 and $21.30 for the past 52 weeks.



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