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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Clint E. who wrote (35032)	11/7/2001 6:55:00 AM
From: Clint E.	Read Replies (2) \| Respond to of 70668

Cisco Systems ( CSCO \| Profile \| Trade ) Buy Author: Ilya Grozovsky F01E: $0.19 F02E: $0.40 Price: $17.90 First quarter revenues and EPS of $4.45 billion and $0.04 beat our, and consensus, estimates of $4.2 billion and $0.02, respectively. International enterprise revenues drove sequential growth - domestic enterprise and service provider business continues to be weak. Gross margins improved 1.7% sequentially to 54% due to product mix and increased volume - prices remain relatively stable. Recent market share gains at the core and edge of the network prove that Cisco should emerge as a stronger competitor from current industry malaise. As a result of the better than expected results in the quarter, we are raising our January quarter revenue and EPS estimate to $4.45 billion and $0.04 from $4.3 billion and $0.02, respectively. Based on our belief that Cisco should emerge from this downturn a stronger company, we are maintaining our buy rating and raising our price target to $24 from $17 based on a 10-year DCF analysis, which uses a 15% WACC and EBITDA multiple of 30x. Solid Quarter, Raising January Quarter Estimates, Maintaining Buy Rating Overall, this quarter's results were pleasantly surprising given the backdrop of declining revenues from some of Cisco's competitors. The strength in the quarter was the company's international business. We would note that the company's domestic business continued to decline, and we believe that until the S&P 500 profitability stabilizes this trend should continue. As a result of the better than expected results in the quarter, we are raising our January quarter revenue and EPS estimate to $4.45 billion and $0.04 from $4.3 billion and $0.02, respectively. We are maintaining our April revenue estimate of $4.5 billion but raising our April EPS estimate to $0.05 from $0.03 as a result of the company's lower operating expense base. We are maintaining our F03 revenue and EPS estimates of $24.6 billion and $0.40, respectively. Based on our belief that Cisco should emerge from the industry downturn a stronger company due to its balance sheet, product breadth, and sales and marketing reach, we are maintaining our buy rating and raising our price target to $24 from $17 based on our 10-year DCF analysis, which uses a 15% WACC and EBITDA multiple of 30x. International Revenues Drive Sequential Growth Cisco's revenue growth in the quarter was driven by international sales, which grew 11% sequentially on the strength of European enterprise spending (European service provider spending was down double-digits sequentially). Sales to Japan also contributed to the results, with 39% sequential growth (though off of a small base). Domestic revenues were down 4% overall, with enterprise down approximately 4% while service provider revenues were down approximately 9%. This trend should come as no surprise given the events of Sept. 11 and the overall domestic enterprise IT and service provider capital expenditure slowdown. Should there be any growth in domestic spending from these segments, Cisco is well positioned to capture a significant portion of the dollars and return to more traditional sequential growth rates. We would note that with S&P 500 profitability continuing to decline, we would not assume any rebound in domestic enterprise IT spending in the near term. We believe that once S&P 500 profitability stabilizes there will be a few months' lag and then there will be resumption in enterprise IT spending. Recent Market Share Gains Prove That Cisco Should Emerge a Stronger Company Over the past few quarters, while the industry has been in turmoil due to reduced spending budgets, Cisco has taken market share in both the edge (approximately 66% share) and core (approximately 70% share) segments of its business. And in the case of the core segment, this has reversed the trend of many quarters. With capital expenditure budgets under severe pressure, taking share from competitors has become one of the only growth engines remaining. We believe that Cisco's ability to gain share should allow the company to exit the current industry downturn a much stronger competitor in the markets that the company addresses and bodes well for future revenue expansion when industry growth returns.