Why 1 Wall Street Firm Dropped the Hammer on Cisco Systems Inc.

By Markets Fool.com


Source: Cisco via Facebook.

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What: Shares of Cisco Systems sank by $0.30, or 1%, in trading Thursday (per S&P Capital IQ data) after theglobal leader in networking infrastructure released its third-quarter earnings results after the markets closed on Wednesday. These results precipitated a downgrade on Cisco Systems' stock from Wall Street research firm Sterne Agee.

So what:Cisco Systems generated $12.1 billion in revenue in the third quarter, a 5% year-over-year increase, with adjusted earnings per share up 12% to $0.54. An aggressive stock repurchase program and cost-cutting contributed to the boost in its underlying earnings, while data center sales and Internet of Everything (IoE) revenue jumped substantially.

However, this report didn't sell Sterne Agee on Cisco. Instead, covering analyst Alex Kurtz downgraded the tech giant from "buy" to "neutral" while leaving his firm's target price unchanged at $31. That price target suggests just shy of 7% upside potential.

Paramount to Kurtz's downgrade thesis was that despite rapid IoE and data center growth, these platforms still don't represent a targeted one-quarter of Cisco's total revenue. Kuntz and his firm suspect that limited growth prospects in Cisco's current model, compounded with a CEO transition -- current CEO John Chambers will soon hand over the reins to Chuck Robbins -- could lead to higher earnings multiples for the company over the near term.

Now what: The real question Cisco shareholders have to ask here is whether they should be concerned by this downgrade or if they should continue investing in Cisco.

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Source: Cisco via Facebook.

On one hand, it's logical to suspect that cutting jobs in order to reduce expenses, while a positive in the near term, compromises Cisco's long-term innovation prospects. Making more and innovating with fewer people isn't easy.

On the flip side, Cisco has made the IoE a major focus of its long-term growth prospects, and as faster-growing data center and IoE revenue become a larger part of the pie, Cisco could return to a growth rate by the end of the decade that we haven't witnessed in a long time.

Currently yielding nearly 3% and not shy with its share repurchase program, Cisco is also doing what it can to support its investors during this ongoing business transition.

Overall, with a long-term growth rate that I believe could be in the middle-upper to upper single igits and a forward P/E of just 13, I'd still consider Cisco an attractive buy. Just understand that explosive growth could realistically be two to five years away.

The article Why 1 Wall Street Firm Dropped the Hammer on Cisco Systems Inc. originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Apple. It also recommends Cisco Systems. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.