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Why Cisco Systems, Inc. Might Be a Stagnant Selection

By Brian D. Pacampara, CFA - Mar 18, 2014 at 1:22PM

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Does this analyst make a good case or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Cisco Systems ( CSCO 0.35% ) traded sluggishly on Tuesday after Barclays downgraded the networking gear gorilla from overweight to equal weight.

So what: Along with the downgrade, analyst Ben Reitzes lowered his price target to $23 (from $25), representing about 7% worth of upside to yesterday's close. So while contrarians might be attracted to the stock's weakness over the past several months, Reitzes' call suggests that the demand headwinds working against Cisco aren't letting up anytime soon.

Now what: Barclays now expects Cisco to post 2015 EPS of $2.12 on revenue of $48.1 billion, down from its prior view of $2.18 and $48.5 billion. "We believe uneven demand trends, secular headwinds, and a lack of major catalysts could keep shares range-bound over the next year," said Reitzes. "[M]aterial upside to estimates does not seem likely at this point and it is also unlikely for the shares to rerate higher until it becomes clear that the company can successfully execute on its major product transitions and fully participate in Cloud and software defined networking (SDN)." Of course, with Cisco trading at a clear P/E discount to its space and boasting a juicy 3.5%-plus dividend yield, those concerns might be providing patient Fools with a solid long-term income opportunity. 

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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