Goldman Sachs raised its 12-month price target on Cisco Systems by 34 percent to $21 Thursday, and upgraded the company to "buy" from "neutral" based on the analysts' expectations of higher earnings in coming quarters.
Goldman's target is based on a price/earnings ratio of 11 times Cisco's calendar-year non-GAAP earnings estimate of $1.90 a share.
"Cisco is not a 'broken' franchise," the analysts said, based on conversations with customers. The analysts also said that "leading surveys suggest that Cisco’s customer franchise is still solid. Moreover, the structural issues it faces are largely contained to the switching business, which drives just one-third of sales."
Goldman sees Cisco earnings rising over several quarters after "four consecutive guide-downs and 43 percent under-performance" against the S&P 500over the last 12 months. Goldman expects fiscal 2012 earnings of $1.80 and 2013 earnings at $1.96, both higher than Wall Street expectations.
Goldman's analysts said the Street has been "under-modeling" Cisco’s cost-cutting actions, which they believe can add 5 percent to 10 percent to fiscal 2012 estimates. The company said last week it would will cut 9 percent of its workforce, or 6,500 jobs, in an effort to boost profits.
The Goldman analysts think Cisco’s sales growth will hit bottom in the current quarter and "re-expand toward what we consider its normalized longer-term growth rate" of 5 percent to 7 percent year on year into fiscal 2012, "even assuming a declining switching business, as we estimate the growth rate of its remaining portfolio at 8 percent to 9 percent."
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Disclosure information was not available for the Goldman analysts but the company does and seeks to do business with companies covered in its research reports.