Shares of Cisco Systems (CSCO) are up $1.21, or almost 7%, in early trading after the company last night offered better-than-expected fiscal Q1 results, with broad improvement in sales across its line of products, and made a better-than-expected Q2 forecast.
Today, there are three upgrades, that I can see, from Citigroup’s John Slack, Deutsche Bank’s Brian Modoff, and Raymond James’s Todd Koffman.
Slack raised his rating to Buy from Neutral, and raised his price target to $22 from $19, writing that Cisco is “turning the corner,” with “solid execution, accelerating order growth and balanced strength across geographies.”
The “leading indicators” are what count here, namely orders:
Order and deferred revenue growth accelerated Q/Q and book-to-bill of ~1 was better than expected in what is normally a seasonally weak quarter. Product order growth accelerated for the second quarter in a row. Product orders were up 13% Y/Y, up from 11% in F4Q, 4% in F3Q, 8% in F2Q, 10% in F1Q and 23% in F4Q’10.
Duetsche’s Modoff is also “encouraged by signs of order momentum,” in upgrading the stock to Buy from Hold., while raising his price target to $22 from $17.
Modoff does acknowledge that amidst better execution, the “mid-tier and low end routing” segment of the business was weak: that group’s sales fell 16%, year over year:
Cisco��s above target Q1 is indicative of: 1) continuity in sales execution (Q1 product revenues up slightly off a strong July); 2) order book improvement (product orders up 13%, orders across key theaters up +12%); and, 3) gross margin stability (62% range). Book to Bill was equal to 1.0x with good linearity. Our latest IT checks suggest that Cisco��s enterprise routing and legacy carrier routing products were the primary drivers of the be! low targ et performance of their mid to low-end routing business (mid to low-end routing revenues down -14% yearly, during Q3). We note that weakness in Cisco��s enterprise routing business was indirectly implied by Cavium in their recent earnings call (noted as weakness in Cavium��s enterprise segment during their September quarter).?That said, we note that Cisco management��s tone seemed constructive on their Q2 outlook. We noted better forecasting accuracy and expectation for slight improvement in IT spending trends during 1H CY12.
Raymond James’s Koffman had the stock at Market Perform for years. He finally changed that to Outperform this morning, with a $21 price target, after seeing Cisco deliver on more reasonable expectations.
“For a long time, Cisco was hanging onto this targeted growth rate of 12% to 17%, and they were running the business to try to capture that growth rate,” Koffman tells me by phone this morning.
“But their size in the markets they play in always made that a very unrealistic target, I thought.”
“When they abandoned that in September, their new targeted growth rate of 5% to 7% seemed to be very reasonable,” he says.
In addition to more reasonable expectations, Koffman thinks Hewlett-Packard’s (HPQ) drama in the last several months — switching chief executives yet again, for example — has lessened the competitive pressure from HP, and that that may be helping Cisco’s profitability, as evinced by its gross margin stabilizing.
“If you look at Cisco over the last five to six years, product gross margin peaked at a little over 70% in the 2003 time frame,” Koffman observes. “They’ve been on this slow water torture decline from 70% down to 61.5% to 62% guidance, and then they printed last night 62.4%.
“You could make an argument you’re finally seeing product gross margin stabilize and could improve from there,” through a co! mbinatio n of less price competition from HP and also streamlining the cost to develop the boxes, says Koffman.
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