by Tom Taulli | November 11, 2013 9:45 am
When Cisco (CSCO) last reported earnings, there was little for CSCO stock bulls to be excited about.
In the fiscal fourth-quarter Cisco earnings report, guidance was weak and layoffs were announced.
The company blamed the tough global economic environment, but CSCO stock has still been fairly weak since then. In fact, CSCO stock has lost nearly 10% in the last three months vs. a 5% gain for the S&P 500.
So ahead of its fiscal first-quarter Cisco earnings report, which will be released on Wednesday after the market closes, there is reason for CSCO stock investors to be concerned.
The consensus estimate is that Cisco earnings will come at 51 cents per share on revenues of $12.35 billion. During the same period a year ago, CSCO posted earnings per share of 48 cents and revenues of $11.88 billion.
The Street’s Cisco earnings forecast is on the conservative side, and not just because of the company’s subdued guidance. CSCO stock analysts have also been factoring in the overall weakness in the enterprise sector. Other companies like IBM (IBM) and Oracle (ORCL) have been feeling pressure because of pullbacks on IT spending.
Yet Cisco earnings could still fail to beat expectations, even with this low bar. The U.S. federal government has been focused on reducing the budget and there has also been a slowdown in China, which could mean further downside risk for Cisco earnings (See: Here’s Why Cisco Stock Still Sucks).
More bad news for CSCO stock investors: The company also continues to face intense competition. Just some of the rivals include Hewlett-Packard (HPQ), Juniper (JNPR), and Brocade (BRCD). Plus, there are also tough operators in China, like Huawei, as well as a spate of fast-growing startups.
To keep up, CSCO has continued to make acquisitions. For example, Cisco has snapped up operators like Ubiquisys (intelligent 3G and LTE small cell technologies), Meraki (cloud-based WiFi systems), Composite Software (next-generation databases), SolveDirect (cloud services) and Sourcefire (security).
But Cisco has still had to rely on cost-cutting. In the last Cisco earnings report, the company announced layoffs of about 4,000 employees, which tallies about 5% of the workforce. It is not clear how long it will take to make the cuts, though.
The good news for CSCO stock investors is that such weakness actually has Cisco stock trading at a fairly reasonable valuation. Shares of CSCO stock are only going for 10 times forward Cisco earnings.
Plus, CSCO stock has some strong fundamentals, including an attractive 2.9% dividend yield and ample resources to keep increasing the payout. In the latest quarter, CSCO generated about $4 billion in operating cash flows.
But there’s still reason for caution going forward, since Cisco stock could suffer more erosion. IT weakness has been broad and there are no signs that the weakness is going away.
As a result, it is probably best to avoid buying CSCO stock ahead of Cisco earnings this week.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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