Cisco beats, but lower guidance spooks the street

It's amazing to see how investors interpret results releases. Especially when it comes to management commentary. You get the feeling that the traders sus out the general consensus as quick as possible and then everyone follows like sheep, trying to eke out those tiny basis point gains. Seeing that more than 50% of the US market is traded by machines, once the traders push a stock down the momentum gathers and the stock stands no chance. This can happen both ways, pushing the stock up or crushing it. Unfortunately Cisco has experienced the latter after they released quarterly results which actually looked pretty good. The stock is down 8.8% post the market.

It wasn't the numbers that disappointed but the forward looking commentary. This is not the first time management have been cautious and the stock has been hit. Sales and Earnings actually came in above consensus, sales of $11.59bn and earnings of 48c per share versus consensus of $11.57bn sales and 47c per share earnings. This is up 20% compared to this quarter last year. Analysts expect earnings this year to come in around $1.84 and $1.93 for 2013. The share trades at $17.15 (following yesterdays fall) putting them on a very attractive forward valuation of 8.9 for 2013 estimates.

So why the low rating? Let's look at the commentary and the fundamentals supporting this $100bn company. CEO John Chambers projected revenue growth of 5%-7% for the next quarter citing significant uncertainty in the global economy as a big risk. Europe and the US public sector has shown some demand weakness, as you would expect.

But the fundamentals are still there. More data is being consumed than ever before. The iPhone 4S consumes 3 times more data than the average smart phone thanks to Siri and its ability to use data so efficiently. Over 35 million of these were sold by Apple last quarter. AT&T and Verizon are spending millions to keep up with this demand. Then you have companies like Netflix which stream movies and the Xbox which allows gamers to play on the web, all of this requires Cisco's products. As technologies improve (the rolling out of 4G as an example) data consumption will only increase and Cisco should benefit.

There are some issues over management which pose a concern for us at Vestact. Last year Cisco scaled back on efforts to expand into more than 30 businesses, rather focusing on a few core businesses. The market liked this (as did we) and the stock started rerating. John Chambers has a controversial self invented management style based on 5 pillars to drive collaboration. The CEO who has been at the company since 1991 has done great things but we feel that maybe a change is needed. Valuations look attractive and the fundamentals look exciting. We remain buyers of this stock but we follow potential reshuffles closely.