Analyst Note| William Kerwin |
We maintain our $56 fair value estimate for wide-moat Cisco Systems shares after it reported strong fiscal third-quarter results. Sales and fiscal fourth-quarter guidance beat our expectations, but were tempered by poor order growth in the quarter that actually sent shares down roughly 4% after the release. Orders, which reflect current demand, are being negatively affected by a soft macroeconomic environment that leads to slower customer spending on Cisco equipment. We aren’t overly concerned with poor order growth in the short term, given Cisco has built a large backlog of orders over the past two years that allows it to post strong results ahead of underlying orders. We expect it to take roughly a year to work through the rest of its excess backlog, which gives the firm time for demand to normalize. Looking past rocky short-term demand, we continue to see Cisco benefitting from healthy long-term networking spending and offering sticky solutions. We think long-term investors should see an attractive entry point at current levels.