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Bear of the Day: Cisco (CSCO)

·4 min read

Cisco (CSCO) is a Zacks Rank #5 (Strong Sell) that designs, manufactures, and sells internet rotocol based networking and other products related to the communications and information technology industry. The company operates globally where it provided infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products.

The stock did pretty well during the pandemic as tech was in demand and people worked from home. But with the Nasdaq sell off, Cisco has had been sold as well. The stock is down 30% in 2022 and only 5% off its lows.  

Earnings out in early May caused the stock to cascade lower. While it has bounced back a bit, analysts have been lowering their estimates. Investors should be cautious in this bear market, as the stock could easily retest those recent lows.   

About the Company

Cisco is headquartered in San Jose, CA and employs almost 80,000 people. The company was founded in 1984 and has a market cap of $180 billion.

The company holds a Zacks Style Score of “A” in Momentum, but “C” in Growth and in Value. That valuation was a big concern in the days of the tech bubble, but some investors actually see a lot of value in CSCO right now. The Forward PE is under 13 and it pays a 3.5% dividend.

While there might be some value there, earnings have led to falling estimates, which has put more pressure on the stock.  

Q3 Earnings

In May, Cisco reported a 1% EPS beat, but missed on revenues. The company cut its fiscal year outlook to a range of $3.29-3.37 from $3.45. Cisco also guided Q4 lower, from $0.93 to a range of $0.76-$0.84.

Margins were slightly lower year over year and cash flow was down. Service sales were down 8% year over year.

Management blamed COVID lockdowns in China and the war in Ukraine, saying that those events impacted revenue in the quarter. They added saying “the fundamental drivers across our business are strong and we remain confident in the long term." 

While Cisco sounds confident the market didn’t like the earnings report. The stock fell from the $50 area to below $42, a drop of over 15% overnight.

Estimates

Because of the poor guidance, analysts dropped their estimates across the board. For the current quarter, we have seen a drop from $0.93 to $0.82 over the last 30 days. For next year, we see a drop from $3.72 to $3.56 over that same time frame. In percentage terms, these are cuts of 12% and 4% respectively.

Technical Take

The stock was up almost 50% in 2021. However, this year has brought selling to levels below the start of 2021. Investors have lost all of last year and now the stock approaches areas not seen since the height of the pandemic.  

The stock is currently trading below all moving averages. The 200-day is at $53.50, the 50-day Is at $45.30 and the 21-day is just above the current price.

If CSCO bulls could break the 21-day, they might be able to get price to that $45 level. However, I would expect selling at that 50-day moving average unless there is an extremely positive catalyst.

If the bulls lose control under $42, expect the earnings lows to be taken out and the stock to trade under the $37 mark.

In Summary

CSCO is an old favorite that went from a dot-com bubble stock twenty years ago to a value stock today. Some investors might find it attractive here, especially with the nice dividend. However, there might be a little more room to go on the downside, so investors should be patient.

For now, a better option in networking might be Digi International (DGII). The stock is a Zacks Rank #3 (Hold) and the stock is in the green for 2022.


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