Buying Cisco Requires a Leap of Faith

Several firms comment on Cisco Systems (NASDAQ:CSCO) this morning after the company released its Q4 results and guidance last night (see earnings summary and conference call transcript):

- Goldman Sachs notes that given its poor outlook for the April quarter, they were clearly too positive on the ability of Cisco's non-enterprise line of business to offset weakness in its enterprise business. Cisco's outlook suggests a much greater degree of uncertainty than the market expected. As a result, the firm believes it will take at least another quarter or two of solid results before the stock can regain sustained positive momentum.

With that said, the stock is trading with a 7% free cash flow yield (a level that typically attracts value buyers) and 14x PE new lowered forecasts. Reducing 6-month price target to $28 from $32.

- RBC Capital notes it's not looking pretty with US enterprise customers and Cisco is pointing to top line growth of just 10% for the current April quarter vs. most views of 15%. RBC was estimating 15-16%. The outlook translates into $9.8B vs. prior consensus of $10.2B. Cisco missed its internal bookings targets for the first time in five years highlighting the magnitude and speed of the deterioration in tech spending. Projects are not being cut but deals are being pushed out and it's getting harder to get purchase orders signed.

RBC's CY08 non-GAAP EPS declines from $1.65 to $1.54 while CY09 EPS declines from $1.81 to $1.70. Shares may be close to a bottom now trading at 13-14X firm's CY08. Their FY08 revenue growth estimate is now 13%. In terms of future revenue revisions, though the environment remains uncertain, Cisco may be taking one big reduction as opposed to multiple iterations. Product book to bill was approximately 1.0

The guidance is not what we had anticipated but we believe there is an extra level of conservatism built into the outlook by Cisco. At current price points, no change to Outperform rating. Believes Cisco may retrench and begin to rebuild its backlog during these uncertain times. Tgt is lowered to $26 from $29.

Notablecalls: Not pretty, though somewhat expected, considering what the likes of Ericsson and Alcatel-Lucent had to say.

With the stock trading around 7x FCF, downside is limited. What is missing is the upside. But maybe a leap of faith is needed here. Ready to take it?

I am. But not willing to pay more than $21.