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MSDW Report Pushes Cisco Lower

It's still to early to say how Cisco Systems Inc.'s (Nasdaq: CSCO) fourth quarter for its fiscal year 2001 will turn out. The final numbers won't be announced until the company's conference call on August 7. But analysts at Morgan Stanley Dean Witter & Co. took a bite out of any optimism that the sector is recovering, predicting that Cisco's quarterly revenues will come in toward the low end of the guidance the company gave a few weeks ago.

By the close of trading, Cisco shares had fallen 1.03 (5.5%) to 17.71. As the most heavily traded stock in the Nasdaq Composite, the move influenced both the entire technology sector and the Light Reading Index, which fell 6.90 (2.34%) to 287.57.

For its fourth fiscal quarter, Cisco executives had previously said that revenues would be in the range of $4.22 billion to $4.69 billion, or flat to down 10 percent when compared with its third quarter results (see Cisco's Q3: Ouch!). In a report released today, Morgan Stanley analyst Christopher Stix says the company's revenues might drop as little as 3 percent or as much as 14 percent, given some field checks and a recent sensitivity analysis conducted by his staff.

(A sensitivity analysis measures how risky an investment becomes when a variable, such as sales, is changed.)

Earlier, Stix had predicted Cisco would show a 3 percent quarter-to-quarter decline in revenues, putting the company at $4.6 billion in quarterly revenues. He writes that an 8 percent decline is most likely, putting the company at $4.35 billion in revenues for the quarter.

That number, of course, is still within the range that Cisco gave during its May 8 quarterly earnings call.

With the lowered quarterly revenue expectations, Stix’s estimate for Cisco’s earnings per share dropped to 2 cents a share from 4 cents a share, which is in line with the Wall Street consensus.

The research note mentioned a few positive aspects of Cisco’s business, including a recent win over Juniper Networks Inc. (Nasdaq: JNPR) for China Telecom’s business. In May, Cisco announced it would be selling 500 of its Cisco 12000 and 12400 Internet routers to China Telecom over the next year. Other Wall Street analysts, including Wit Soundview and Salomon Smith Barney have recently noted the likelihood that Cisco has won some business over Juniper.

While observing that a 10 percent sequential revenue decline was already reflected in Cisco’s current stock price, Stix lowered his price target for the stock to $22 from $25. According to First Call, the average price target for Cisco’s stock by analysts is $24.75.

Morgan Stanley gives Cisco’s stock an Outperform-V rating, the brokerage’s second highest of four possible ratings. “V” is for "volatile," meant to signal investors that Cisco’s stock price is likely to move around a lot.

"Quite honestly, we don't know how to call it at this stage, but we view the 8 percent [quarterly revenue decline] as the most likely case," Stix writes.

- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
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