Merrill Analyst Clarifies Cisco Call
Cisco Systems Inc. (Nasdaq: CSCO) stock hit new lows after early morning news broke that Merrill Lynch & Co. Inc. (NYSE: MER) had lowered the stock's rating to its clients. But Michael Ching, the analyst involved, has told Light Reading that he sees no slowdown in Cisco's optical sales.
"We have yet to see slowdowns in most of Cisco's business," he wrote in a note today. "Based on some recent surveys, we are anticipating that a slowdown is possible, although we are not seeing that in optical sales." (Italics are ours.)
Instead, Ching says his rating change has to do with "emerging fears over a slowdown in corporate IT spending," a market that doesn't directly affect optical networking at all. He says he lowered his "intermediate term" rating on CSCO from "Buy" to "Accumulate" because Merrill's surveys of IT managers show they perceive prices on data networking gear have gone down, an indicator that demand may be lower than before.
Also, the firm believes that Cisco's stock price is in need of correction. "At the current price, the stock is trading at about 50 times forward four-quarter EPS," Ching wrote in a recent report. "Historically, Cisco has traded at about 30 times."
Elsewhere in the report, Ching expresses fears that a slowdown in the carrier market may be hitting enterprise customers. Ching cites yesterday's earnings warning by Foundry Networks Inc. (Nasdaq: FDRY) as a first hint that "revenue growth would be negatively impacted by capital spending issues at the emerging [ISPs]." (See Foundry Slammed After Warning.) But he doesn't think that's going to affect Cisco's ability to meet its numbers. He notes that "we are not reducing our revenue or earnings forecasts for this year or next.... Longer term, Cisco remains one of our favorite picks."
Despite the fine print, the report seems to have aggravated market jitters: In midday trading, Cisco's share price had plummeted more than 12 percent to a new 52-week low of $36.44.
-- Mary Jander, senior editor, Light Reading http://www.lightreading.com