Amid a sea of high-price technology stocks , Cisco Systems shares look like a bargain. At least, that's what Morgan Stanley's Meta Marshall thinks. On Thursday, she raised her rating on the networking equipment giant's shares to Overweight from Equal Weight, while upping her price target to $54 from $46.
Marshall observes in a research note that Cisco's (ticker: CSCO) earnings-multiple discount to the S&P 500 has reached a 10-year high, "despite durable earnings growth." She writes that she is "mindful of secular headwinds and broad macro exposure"—Cisco is no place to hide from a recession—but adds that "growing networking/security needs, cash flow flexibility and operating expense discipline provide tailwinds" which should help close the valuation gap to the broad market over the next 12 months.
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Marshall argues that Cisco's strength in public-sector and service-provider markets will partially offset weakness in enterprise and campus markets—and she also thinks enterprise spending on networking and security will persist with a more distributed workforce and the adoption of more cloud applications over the next four quarters.
She adds that Cisco has enough cash-flow flexibility around share repurchases and acquisitions and expense-management discipline to keep earnings growth about in line with the S&P 500.
Marshall also thinks the company needs to get better at explaining the new Cisco to investors and to shuck its reputation as an old-school infrastructure provider.
"While Cisco has improved telling their own next-gen story over the past few years, we believe they are still not as good at telling the story to close the gap fully with the S&P," she writes. "Cisco gets grouped into the 'old tech' bucket because they have leadership share of on-premise data center switching. While there are headwinds to that business, that business is estimated to only be high teens percentage of revenue, with steadier trends amongst most of the rest of the business."
Cisco shares are up 1.9%, at $46.68, in recent trading. The S&P 500 is flat.