So much is going right for Cisco Systems, Inc. (NASDAQ:CSCO) these days, it would be a shame if quarterly earnings were blemished by something entirely outside its control, but it’s quite possible nonetheless.
Wall Street analysts are expecting big things in Cisco earnings, but with more than 40% of revenue coming from overseas, currency risk remains high. After, all we’ve seen the strong dollar hurt revenue across all multinationals this earnings season.
Weaker-than-expected earnings in Europe or Asia could also deliver an unpleasant surprise, but the consensus is that CSCO is enjoying solid and steady growth in IT spending as it successfully expands software and cloud service businesses among enterprise and carrier networking customers.
Even if the stronger dollar hurts CSCO results more than expected, the industry backdrop remains favorable. Piper Jaffray recently reiterated its “overweight” (essentially a “buy”) call on CSCO stock, citing surveys that point to higher demand. As the analysts said in a report to clients:
“We saw CIOs expect to increase their budgets on areas including switching, routing, WLAN, and security, which according to our survey are all categories that Cisco is well positioned for increased spending.”
Like Piper Jaffray, Analysts at Oppenheimer rate CSCO at “outperform” (“buy”), but analysts there think fears of currency headwinds are overblown. That said, Europe remains an area of concern:
“While our European checks were not outright negative, we remain cautious on the region given macroeconomic weakness. Strength in the region was noted last quarter (6% YoY order growth), and thus we’re concerned that a bullish view on the region was incorporated into outlook.”
CSCO Stock Looks for a Boost on Earnings
The bullishness can be seen in analysts’ earnings projections. For the most recent quarter, CSCO earnings are forecast to rise to 51 cents per share from 47 cents in the year-ago period. Notwithstanding the painful transition in services, CSCO is projected to report a 6% gain in sales to $11.8 billion.
The outlook should be favorable as well. Analysts see the potential for multiple expansion this year as CSCO revs up its transition to recurring revenue software and cloud services.
“Our midquarter channel checks suggest setup for a better than anticipated January quarter driven mainly be stronger than expected U.S. enterprise IT activity in data center switching, security, unified computing systems, Meraki and services.”
Additionally, although a stronger dollar and economic sluggishness overseas could weigh on revenue and earnings, U.S. strength should more than offset any effects. Said Deutsche Bank, which holds a “buy” rating on CSCO stock:
“We note U.S. enterprise IT spending up likely 3%-4% year over year and Cisco in share gains mode in switching, advanced services, security and wireless. Europe, Middle East and Africa IT spending in large enterprises and in the tier-1 telcos is holding up better than expected; while emerging markets are trending flat to slightly weak (Japan and Latin America foreign exchange impact, China weakness, etc).”
CSCO stock is outperforming the broader market over the last 52 weeks by about six percentage points, but it has gotten off to weak start this year. For the year-to-date, CSCO is down 2.5% vs. an essentially flat S&P 500.
There should be nothing in the upcoming earnings report to punish shares further. If anything, better-than-expected results would likely get CSCO stock out 0f the red for 2015.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
