Cisco shares drop on downgrade

Shares of the networking giant continue to fall to new 52-week lows after Merrill Lynch downgrades the stock on concerns about slowing capital spending.

Larry Dignan
3 min read
Shares of Cisco Systems continue to fall to new 52-week lows Wednesday after Merrill Lynch downgraded the stock on concerns about slowing capital spending.

In earlier trading, Cisco was down $6.44, or more than 14 percent, to $35.31 on the Nasdaq, its most recent new 52-week low. Shares ended the regular trading day down $5.25, or more than 12 percent, at $36.50.

Wednesday marks the seventh straight day Cisco's shares have dropped. On Tuesday, shares hit what was then a new 52-week low of $41.50 before closing at $41.75. Overall, the networking giant's share price has been sliced in half since its 52-week high of $82 in late March, despite Cisco executives' recent predictions of good financial results for the current second quarter and the rest of the fiscal year.

Slowing spending on information technology and capital spending cuts from telecommunications providers are causing financial headaches for next-generation networking equipment makers.

Merrill Lynch analyst Michael Ching believes Cisco cannot 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."

Cisco representatives were not immediately available for comment.

Among other networking companies, Foundry Networks was the latest to take a hit, as shares fell 50 percent after the company issued a profit warning. Shares of networking companies Sycamore Networks and Juniper Networks also traded lower Wednesday.

Ching did not cut his revenue or earnings estimates for Cisco, but said the company is not likely to pull off surprises given slowing demand for next-generation switching products, pricing pressure and slowing corporate IT spending.

Ching gave the following reasons for the downgrade:

 Slowing ISP spending: Citing Foundry's profit warning, Ching said Cisco could take a revenue hit. Next-generation switching products represent 20 percent of Cisco's sales. A host of telecommunications companies have cash problems. Cisco also recently set aside reserves to cover customers that cannot pay the bills.

 Price pressure in the enterprise market: A recent Merrill Lynch survey raised some concerns about falling prices. "The data suggests we could be starting to see a little more pressure on prices of data networking equipment," Ching said. Specifically, Merrill Lynch found that 17 percent of managers say they believe prices are down more than 10 percent from last year. An August survey found that only 4 percent said they believed prices were falling more than 10 percent.

 Macroeconomic issues: The economic slowdown will "prompt investors to become increasingly concerned about a deceleration in corporate IT spending in general," Ching said. The enterprise and small- and medium-business market accounts for 65 percent of sales.

In the long run, Ching said, Cisco remains one of his top picks, but he added that recent economic concerns could put a dent in the company's pricey market capitalization.

Ching is not 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."

News.com's Wylie Wong contributed to this report.