Shares of legacy networking hardware vendor Cisco Systems Inc. (CSCO) are trading up on a bullish analyst note from Credit Suisse yesterday. Analysts foresee the San Jose, Calif.-based enterprise IT leader thriving under President Donald Trump’s proposed tax reform, indicating it would allow the firm to boost its shareholder-return program and continue on its strategic acquisition spree intended to diversify away from declining hardware sales. (See also: Analysts Upbeat on Cisco’s Security Segment.)
Firm Earns ‘Double Upgrade’
The Credit Suisse analysts raised their rating on the tech giant’s stock to outperform from underperform, issuing a rare “double upgrade.” The analyst also lifted their price target on CSCO to $40 from $27, indicating an 18.4% upside from the stock’s trading price of $33.77 on Friday morning.
“We believe the possibility of an upcoming repatriation and balanced approach towards M&A and capital return could drive [long-term] EPS power,” wrote analyst Kulbinder Garcha. “In an environment of tax reform, we believe the company has the capacity to accelerate the company’s transition towards a diversified IT player.”
Credit Suisse says the tech giant could make a series of meaningful acquisitions in the upcoming period, eyeing Splunk Inc. (SPLK), ServiceNow Inc. (NOW) and Palo Alto Networks Inc. (PANW) as possible buyout targets.
Analysts Upbeat on Restructuring
Despite challenges in Cisco’s traditional switching equipment business, which makes up 30% of its revenue, analysts say a larger restructuring away from networking can drive growth.
“At the heart of our change of view, is that the company is embarking on a successful transformation that diversifies the business away from switching, becoming a more diversified IT player with a higher recurring element of software offerings,” wrote Garcha.
While networking represented 83% of Cisco’s revenues in 2000 and 53% in 2010, the segment has dropped down to 45% of total business. Analysts remain bullish on Cisco’s ability to transform into an “integrated IT player” as new management emphasizes the importance of building up a software and services business and a recurring revenue stream. (See also: Cisco’s New Software Threatens its Core Business.)