Shares of Cisco Systems (CSCO) are on the rise after Credit Suisse analyst Kulbinder Garcha double upgraded the stock to Outperform, arguing that the company’s transition toward a diversified IT player can be accelerated in an environment of tax reform. Further, the analyst sees Splunk (SPLK), ServiceNow (NOW) and Palo Alto Networks (PANW) as the top three potential takeover targets for Cisco if it embarks on a “transformation” via M&A.
BUY CISCO: In a research note to investors this morning, Credit Suisse’s Garcha upgraded Cisco to Outperform from Underperform as he believes the company is assembling a portfolio of businesses which should allow it to produce low single digit revenue growth and continued operating leverage. Moreover, the analyst noted that he thinks the possibility of an upcoming repatriation and balanced approach toward M&A and capital return could drive long-term earnings per share power toward $3.30- $3.50. Deals could diversify the company away from the “challenged economics in networking,” Garcha contended. Additionally, the analyst told investors that Cisco’s “major balance sheet could be unleashed,” allowing it to return an incremental $30B to shareholders over five years, which would leave up to $20B for more transformative acquisitions. He also raised his price target on the shares to $40 from $27.
M&A TRANSFORMATION: Credit Suisse’s Garcha pointed out that Cisco has done about 45 deals over the past five years, with 70% of them in software. In a repatriation environment under the new U.S. administration, the analyst argued that larger transactions could be beneficial as they accelerate the transition away from networking, improve top line prospects, and make the revenue stream more recurring. According to his M&A analysis, Garcha identified Splunk, ServiceNow and Palo Alto as the top three takeover targets for Cisco.
PRICE ACTION: In morning trading, shares of Cisco have gained about 1% to $33.71, while Splunk is up 1.5%, Palo Alto has advanced 1% and ServiceNow has risen over 4%.
