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Friday, August 04, 2006

What is the Street Expecting From Cisco Systems?

On Tuesday we will have more to look forward to than the FOMC meeting that will give us the status on if the fed is done or close to being done in its belligerent rate hiking mode. Cisco Systems (CSCO) reports earnings after the close on the same day.

What you may not have noticed is that CSCO shares at the $17.24 close today are less than 3% above their 52-week lows of $16.83. In the last 5-years this stock has gotten within inches of $29.00 and has traded under $10.00 in 2002. This really puts it at the lower-end of its 3-year trading range.

What it makes you wonder is just how bad the street is expecting the verbiage to be. It also makes you wonder if the street is anticipating that the next technology spending wave from telecoms and corporations is dead from top to bottom.

Cisco in the last few years has transformed itself from a router-driven company into a company that provides almost every aspect of networking needs for telecoms, cable operators, and corporations. It now is also in many wireless and security initiatives, it has set-top box operations from Scientific Atlanta, and even has a large portion of the home and small business networking market through its Linksys unit. The company is still going to be very much tied to GDP growth (as CEO John Chambers has said in the past), but now we have to hear what Chambers says since they are such a transformed company.

Because of all of the management gaps inside Juniper (JNPR) and because of internal issues, they have essentially stopped stealing market share from Cisco. The gains made from the 3Com/Huawei joint venture have been good for majority owner 3Com (COMS), although the look-alike routers haven't been sizably denting Cisco on a real level. Both Foundry (FDRY) and Extreme Networks (EXTR) have been relegated to a sort of unwanted step child existence where they are allowed to live and prosper, so long as they do not get in the way too often and do not take away too much of the resources. We have had a consolidating telecom operator universe, and we have noted on numerous times that this will create a telecom equipment supplier environment full of good hits and bad misses.

So what is the street expecting?

Just this Thursday Cramer gave negative comments on CSCO in the "Lightening Round," for whatever that is worth. R.W.Baird just downgraded the stock from an Outperform to a Neutral and took the target down to $19.00. Rochedale this week took off its Sell rating, but it only went to a Hold rating. What you have to expect though is that on Monday and even on Tuesday you will get changes on ratings and estimates at the last minute as the analysts start to hedge their prior numbers and after they have done all of their last minute research over the weekend. So please understand that the numbers hereafter may end up being different.

Estimates on a consensus basis appear to be $0.28 for EPS and just over $7.9 Billion in revenues. The year-over-year comparables are going to look huge because of the $6.58 Billion revenue for the July quarter in 2005, but that is because Cisco has acquired Scientific Atlanta and other operations. If the company offers any formal guidance, you can compare it to a flat EPS $0.28 estimate on slightly lower sequential revenues of $7.85+ Billion. The consensus estimates for fiscal July 2007 is also $1.20 EPS and about $32.8+ Billion in revenues.

It is probably safe to say that Cisco will get less coverage than normal because of the FOMC and the decision on rates, but this will give you a glimpse ahead of what the telecom equipment and networking markets for the next couple of quarters. Hopefully Chambers knows better by now than to compare their forward growth to GDP, and we'll know what it is on Tuesday.

We will send an options update on Monday or Tuesday, as well as any last minute changes that affect the consensus estimate or any anchor calls.

Jon C. Ogg
August 4, 2006

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