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Why We're Downgrading Cisco's Moat Rating

Three key long-term considerations have caused us to change our view of the sustainability of Cisco's competitive advantage period.

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 Cisco Systems (CSCO) provided an update on its longer-term strategy and financial road map yesterday at its financial analyst conference. Management's updated three- to five-year revenue growth forecast of 3%-6% annualized is moderately above our current five-year projection of 2% annualized organic growth, while the rest of management's financial targets are about in line with our current model. 

We remain comfortable with our current five-year explicit financial forecasts, and we are maintaining our fair value estimate. We continue to expect Cisco's operating margin to remain relatively stable and the firm's free cash flow to grow moderately during the next five years, as the company offsets pressures in its core router and switch businesses with ongoing investment in network security, systems management software, mobile infrastructure, services, and converged computing systems.

Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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