Cisco expected to cut growth targets

Cisco has fallen from a 52-week high of $70 to a low of $13 this year, but shares have rebounded to around $20 on hopes that the company will be upbeat on its earnings conference call. Wall Street has been trying to get a read on Cisco's earnings for weeks.

Despite the company's recent struggles, Cisco CEO John Chambers has maintained that the company can grow sales 30 percent to 50 percent over the long run. However, many analysts said a 20 percent growth rate is likely.

Most analysts agree that the company should come in on target with Wall Street's estimates for its fourth quarter. First Call is expecting earnings of 2 cents a share on revenue of $4.34 billion. "We believe that the company will meet our revenue and earnings estimates," wrote Merrill Lynch analyst Michael Ching in a research note. Ching is predicting earnings of 3 cents a share on revenue of $4.49 billion.

With the quarter in the bag, Wall Street has homed in on the company's outlook. And that's where things get sticky.

Even if the company does make its numbers, that accomplishment will be "nothing to write home about," said Credit Suisse First Boston analyst Lissa Bogaty. She expects Cisco to predict flat earnings and sales for the first quarter of fiscal 2002. First Call is currently expecting the company will make earnings of 4 cents a share on revenue of $4.43 billion, slightly above the fourth-quarter results.

Morgan Stanley analyst Christopher Stix also said he anticipates the company's results to be lower than expected for the first quarter; he expects Cisco will predict revenue that's flat to down 5 percent.

Analysts also predicted the company could reduce its long-term growth predictions. "While we are looking forward to the tone of the conference call to be less somber, we expect the company to continue to be cautious and could subtly talk down long-term growth prospects," Bogaty wrote. She expects Cisco will back off its traditional 30 percent to 50 percent growth predictions.

ABN AMRO analyst Kenneth Leon likewise thinks the company won't live up to expectations in future quarters. "At best, we see Cisco maybe reaching 18 percent to 20 percent long-term growth," he said.

Ching also predicted future disappointments from the company. "We are somewhat concerned about our October (second) quarter and our fiscal 2002 estimates," he said.

Ching's recent market research has shown that the LAN (local area network) switching market will only grow 8 percent in 2002, and the router market will only grow 13 percent. Couple that growth with weak telecommunications-carrier spending, and it's tough to get to Cisco's growth targets.

If Cisco tones down its outlook, investors are likely to be disappointed.

"We believe the current share price already assumes bullish guidance that is unlikely to be forthcoming," said Berstein analyst Paul Sagawa. "Continued poor corporate earnings and deteriorating conditions in Europe portend continued weak demand and therefore cautious guidance."

Sagawa said a fair price for Cisco shares is $14 to $15.

But despite the worries about Cisco's future growth rates, Wall Street remains in Cisco's corner with 23 analysts rating it at least a "buy." Analysts tout Cisco's strong, debt-free balance sheet, products that focus on both the enterprise and telecommunications markets and likely market share gains against rival Juniper Networks. "Its product mix and management are probably the best in the telecom equipment space," Bogaty said.