At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
A Suisse hit or a Suisse miss?
Credit Suisse is starting off this week looking like the busiest of beavers, assigning new ratings to high-profile tech stocks right and left. Yesterday, we took a look at the firm's negative sentiment on Chinese search star Baidu.com (Nasdaq: BIDU ) . Today, we shift our attention a bit closer to home: Credit Suisse's bullish prognosis on Cisco Systems (Nasdaq: CSCO ) based on "improving business trends at Cisco throughout the quarter" and the resulting "expected earnings momentum."
According to CS: "Cisco's North American business is showing steady, modest signs of improvement from last quarter," offsetting "substantial weakness in the rest of the world." Investors focusing on global weakness, therefore, may be underestimating how well Cisco will perform when it reports earnings two weeks hence.
But is Credit Suisse right?
Let's go to the tape
Maybe. But I personally suspect that Credit Suisse is pushing its luck with this one. As we saw yesterday, the banker has more than shown its chops in the Internet Software and Services sector. Conversely, its record in hardware and other IT industry picks is suspect. Alongside such hits as ...
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Company
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CS Says:
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CAPS Says:
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CS' Picks Beating S&P by:
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Apple
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Outperform
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***
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91 points
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EMC (NYSE: EMC )
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Outperform
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****
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24 points
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Hewlett-Packard (NYSE: HPQ )
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Outperform
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***
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38 points
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... we find CS making wrong calls on:
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Company
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CS Says:
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CAPS Says:
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CS' Picks Lagging S&P by:
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Alcatel-Lucent (NYSE: ALU )
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Outperform
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**
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45 points
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Nokia (NYSE: NOK )
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Outperform
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****
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9 points
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LM Ericsson
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Underperform
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**
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62 points
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Cisco is trading at a fairly high multiple already. Valued on its earnings, the stock is selling for a multiple of 17 -- pretty rich for a company that most analysts think will struggle to exceed 10% long-term growth.
And while it's true that Cisco is a lot more profitable than meets the eye (its $10.3 billion in free cash flow exceeds reported "earnings" by 45%), the stock still sells for about 12 times its trailing cash profits. Again, not something you want to see in a 9.5% grower.
Given all of this, I have to say that there isn't a lot of room for error in Credit Suisse's outperform rating here.
Financial analysts of a feather
That said, there does seem to be a growing consensus that IT spending is perking up. There was Intel's (Nasdaq: INTC ) surprisingly strong earnings report last week, of course. Additionally, CS peer UBS just released a report predicting that although "corporate IT budgets [will probably end] down 5-10 percent in 2009," this is less of a drop than UBS was looking for three months ago, and "CIOs may be looking at 2010 as a potentially better year for overall corporate spending."
With much corporate hardware now three to five years old and in danger of antiquation, UBS believes that IT departments may be ready to bite the bullet and start spending on upgrades again. UBS thinks that Cisco's new "Unified Computing System" -- a system incorporating computing, storage, and virtualisation elements -- will prove a key beneficiary of corporate wallet-opening. Goldman Sachs had a similar take on things earlier this month.
Foolish takeaway
After climbing more than 50% from its March lows, Cisco is no longer the cheapest stock on the planet. And at today's price, it's going to take a whole lot more than 9.5% growth to make this stock a bargain. That said, if the analysts are right that IT spending is about to rebound -- and Cisco's growth rate with it -- then the stock just might be worth the price.
But it's a big if. Be careful.
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