Shares of Cisco Systems (Nasdaq: CSCO) fell 11 percent to a 52-week low Wednesday after Merrill Lynch downgraded the stock on concerns about slowing capital spending.
In early trading, Cisco was off 4.56 to 37.18. Merrill analyst Michael Ching was the latest Wall Street analyst to voice concerns about Cisco. Slowing IT spending along with capital spending cuts from telecommunications providers are hitting next-generation networking equipment makers with a double whammy.
Foundry (Nasdaq: FDRY) was among the latest equipment makers to take a hit, as shares fell 50 percent after the company issued a profit warning. Shares of networking companies Sycamore Networks (Nasdaq: SCMR) and Juniper (Nasdaq: JNPR) also traded lower Wednesday.
Ching's thesis is that Cisco can't be immune from the slowdown forever. He downgraded his "intermediate term opinion to "accumulate" from "buy" and added that Cisco was being downgraded for "guilt by association."
However, Ching didn't cut his revenue or earnings estimates for the company, but said Cisco wasn't likely to pull off upside surprises given slowing demand for next generation switching products, pricing pressure and slowing corporate IT spending.
Ching gave the following reasons for the downgrade:
In the long run, Ching said Cisco remains one of his top picks, but said recent economic concerns could put a dent in the company's pricey market capitalization.
Ching isn't alone with his worries about Cisco. In another research note Wednesday, ABN AMRO analyst Kenneth Leon noted that the "game has changed for both telecom equipment companies and investors as market conditions have shifted from cloudy to rain."
In the current environment investors will refrain from valuing companies on forward sales and shift to conservative benchmarks like cash flow and earnings, he said.
That's bad news for Cisco and its rivals. Despite its recent tailspin, Cisco is still carrying a price-to-earnings ratio of 101.