Will Cisco beat and raise?

Posted Feb 1st 2007 3:40PM by Peter Cohan
Filed under: Earnings Reports, Forecasts, Cisco Systems (CSCO)

At $26.62, Cisco Systems, Inc. (NASDAQ:CSCO) remains 68% below its March 2000 all-time high of $82. And analysts expect it to post a 9.5% increase in earnings for the fourth quarter. Is this achievable?

During the 1990s I enjoyed significant access to Cisco's executives -- interviewing them for my books The Technology Leaders, Net Profit, and e-Profit. What impressed me most about the company was its ability to adapt effectively to changing technology through an acquisition strategy designed to keep its sales force stocked with the latest products that its customers wanted to buy. Although industry growth has not resumed the 30% to 50% it enjoyed during the 1990s, Cisco has managed to avoid imploding as some of its fellow dot-com travelers did.

CSCO has performed well financially -- with help from its $6.9 billion acquisition of Scientific Atlanta, a maker of set top boxes, in 2005. For the last 12 months, CSCO's revenues grew 15% to $30 billion and its net income increased 28% to $5.9 billion. This revenue growth is triple CSCO's five-year average revenue growth of 5%.

But future expectations are below the last year's performance. 17 analysts surveyed by MSNMoneyCentral expect CSCO, whose fiscal year ends in July, to post Q2 2007 EPS of $0.28, up a mere 9.5% from the same period in 2006. These analysts expect CSCO to post 2007 EPS of $1.18, up 13.4% from 2006.

Cisco is in the habit of generating earnings surprises which have averaged 6.5% ahead of expectations. Last year Cisco beat Q2 expectations by two pennies a share, or 8.3%.

At a P/E of 28, CSCO appears overvalued even if it maintains 15% profit growth. I suspect it will beat expectations because of its track record of doing so but I don't know whether CSCO will beat and raise enough to get investors eager to gobble up the stock. What do you think?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College, and edits The Cohan Letter. He has no financial interest in Cisco Systems.

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Tags: Cisco Systems, CiscoSystems