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Cisco Hits New 52-week Low

Posted on Thursday, Feb 7th 2008

Yesterday, Cisco (Nasdaq: CSCO) reported its financial results for Q2 2008 that met analyst estimates but forecast a slow Q3 reflecting cutback in technology budgets in the US. This news sent its stock plummeting to around $23 after hitting a 52-week low of $22.30 on January 23. Market cap is around $140 billion. This morning, the 52-week low number has changed to find a new low of $21.77.

Chart for Cisco Systems, Inc. (CSCO)

Q2 2008 net sales increased 16.5% y-o-y and 2% sequentially to $9.8 billion. GAAP net income was $2.1 billion and EPS increased 6% y-o-y to $0.33. Cisco repurchased shares for $4.0 billion in the quarter.

Segment-wise, routing revenue grew by 18% y-o-y and 4.5% sequentially to $1.96 billion led by growth in high-end routing products at 27% y-o-y. Switching revenue grew 11% y-o-y and 2% sequentially to $3.35 billion. Advanced Technologies revenue grew 25% y-o-y and 2% q-o-q to $2.4 billion with strong performance in unified communications, storage and video systems. Unified Communications revenue including WebExgrew at 60% y-o-y and excluding WebEx grew at 30% year over year. Continuing to reap the benefits of online video and network convergence trends, Cisco reached the milestone of 100 Cisco TelePresence customers and Scientific-Atlanta revenue grew approximately 20% y-o-y.

Region-wise, revenues from US& Canada declined 4.5% sequentially to $5.25 billion, Europe grew 4% sequentially to $1.98 billion, Asia Pacific grew 7% sequentially to $1.05 billion, Japan grew 7.5% sequentially to $0.33 billion, and Emerging Markets grew 4% sequentially to $1.23 billion (versus 10.24% q-o-q decline in Q1). Read my earlier posts here and here that hinted at an emerging market weakness. This quarter results show that Cisco is improving in the Emerging Markets, but growth is nothing like what we see in HP or IBM. HP’s BRIC growth is 37% y-o-y. So what will offset the US economic slowdown?

In terms of y-o-y orders, the emerging market story is somewhat more encouraging. US grew 12%, Europe grew 8% (versus 20% in Q1), Emerging markets grew 24% (versus 35% in Q1), and Asia Pacific grew 23%. However, January’s order growth rates were approximately 10%, less than its expectations. With this as a basis, Cisco has reduced its revenue guidance for Q3 2008 to growth of approximately 10% y-o-y.

Chambers, the eternal cheer leader, is not so cheerful. In four months, the stock has gone from a 52-week high to a 52-week low. Nonetheless, Cisco is a great company. If you are a courageous investor, Buy for the long term. But things will be choppy, spooky, unsettling, so don’t get a heart attack over this.

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Instead of buying the stock outright, consider sellling short duration atm put options in combination with buying longer duration far otm call options. As you said it’s going to be a choppy year, vola is high, the more so in CSCO, which makes this baby a compelling synthetic play. In addition you don’t have to time your buys nor do you have to adhere to immediate stoploss levels.
Kind regards,

Orca

orca Saturday, February 9, 2008 at 2:07 AM PT