What's Wrong With Cisco Systems Inc. Today?

Cisco Systems (NASDAQ: CSCO  ) is one of the Dow Jones Industrial Average's (DJINDICES: ^DJI  ) worst performers today. The networking equipment giant's shares fell as much as 1.5% this morning. That was the third-largest drop among the 30 Dow members. So what's wrong with Cisco this time?

First, let me point out that the Dow's larger drops rested on real, company-specific news.

Boeing (NYSE: BA  ) plunged as much as 2.8% due to a disappointing second-quarter report. A one-time tax gain helped Boeing beat earnings estimates, but that low-quality profit booster couldn't make investors forget about a slight revenue miss. So Boeing can only blame its own results for today's falling share prices.

Likewise, heavy-machinery builder Caterpillar (NYSE: CAT  ) dropped as much as 1.6% on some very specific news. Caterpillar just announced rolling three-month sales figures, broken down into geographical and industry-specific categories. Despite a 14% year-over-year surge in North American machinery sales, a 30% plunge in Asian orders and 21% lower European sales dragged global sales down by 10%. That's a slight rebound from the 12% overall sales drop reported last month, but investors don't like slow recoveries.

Cisco's fall is a different story.The company itself has nothing but cheerful news to share today. Cisco is opening an innovation center in Barcelona, Spain, as part of its Smart+Connected Communities program. Searching for the next big Internet of Things idea, Cisco is accepting applications for an entrepreneurship residence in Europe. And the company wants you to know that Cisco technologies help Brazilian stockbrokers trade faster.

Can the Nexus 9000 product family help Cisco overcome a generally soft market? Source: Cisco.

No big growth catalysts there, but also nothing worth giving Cisco shares a 1.5% haircut over.

Instead, Cisco's weakness comes from sector rival Juniper Networks (NYSE: JNPR  ) , which reported second-quarter results last night.

Juniper's earnings came in just a hair below analyst estimates, and it followed up with soft third-quarter guidance. The stock saw one immediate downgrade on the news, and two other analyst firms lowered their Juniper price targets.

Juniper shares plunged as much as 11.4% on this barrage of bad news. Cisco simply got caught in the collateral damage, alongside many other networking gear specialists.

But is there any reason to draw industrywide conclusions from Juniper's terrible day? Let's dive into those negative analyst notes on Juniper's quarter.

  • Piper Jaffray said the networking market seems destined for "low-mid single-digit growth," which reduced analyst Troy Jensen's enthusiasm for Juniper.

  • Goldman Sachs pinned Juniper's bad trends on soft infrastructure spending at America's largest telecom carriers. This market weakness "was likely due to M&A activity under way," said Goldman analyst Simona Jankowski.

  • Bank of America/Merrill Lynch also noted the lagging carrier sales, but worried about shifting market shares in the networking sector. Specifically, analyst Tal Liani cited Cisco's refreshed product portfolio, which seems poised to steal orders from Juniper.

So Juniper's troubles uncovered a sluggish environment of telecom-level network upgrades. That's bad for everyone: Cisco is just coming back from several quarters of negative year-over-year growth in the service provider market, and it could use a respite from flagging telecom sales.

However, Cisco already said that it expects a few more quarters of these telecom downticks, so there's nothing new about Juniper's revelations if you've been listening to Cisco's own comments. Moreover, Liani underscored the strength of Cisco's new long-distance routers. That puts pressure on Juniper to fight back with profit-sapping discounts while Cisco reaps the benfits of holding the hot ticket for a while.

The markets most certainly shouldn't slash Cisco's shares by 10% based on Juniper's soft report and timid market commentary. But even if Cisco is winning share in a struggling telecom infrastructure market, the overall sector softness seems likely to hold this important segment back for another few quarters.

All things considered, Caterpillar and Boeing deserved their noogies even more, but today's 1.5% drop looks like a fairly appropriate slap on Cisco's wrist.

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