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Investors reacted poorly to Cisco’s sales miss, but now that the company has agreed to buy back another $15 billion of this stock, could today’s market jitters be a buying opportunity in disguise?
Let’s discuss the issues:
Cisco is a producer of IP-networking and communications products for businesses and home users—including custom enterprise solutions on down to the low-cost Linksys product line of access points and switches as well as broadband cable modems. The company is a big player in the tech industry, and is known for giving investors a glimpse of coming economic and industry trends. In FY 2013, the company earned $9.98 billion on $29.44 billion in sales.
For Cisco, 2013 has been one big buying spree. Last month, the company completed its $2.7 billion acquisition of Sourcefire (FIRE) a leader in intelligent cybersecurity solutions. Over the summer, Cisco also bought out JouleX for $107 million, a company which helps data centers and network operators with enterprise IT energy management.
The company recently announced its intentions to acquire WHIPTAIL, an expert in high performance solid state memory systems, for $415 million. There’s no question that this aggressive acquisition strategy will impact 2014, but the question is whether these deals will be accretive or dilutive to earnings. As for the analyst community, the consensus is that next year Cisco will grow sales 5.6% and earnings 7.6% over 2013.
However, after this yesterday’s disappointing earnings announcement, these estimates could be revised even lower.
The world’s largest computer networking gear company reported mixed results for the first quarter. Compared with Q1 2013, revenues ticked up 1.8% to $12.1 billion. This missed the $12.36 billion consensus forecast. Over the same period, net income slid 4.8% to $2.0 billion, or 37 cents per share. The GAAP results included several charges related to the company’s workforce reduction plans as well as its recent acquisitions. Excluding special items, adjusted earnings were 53 cents per share, which topped analyst EPS estimates of 51 cents per share.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. With the exception of the summer months, which CSCO spent at a B-ranked buy, 2013 has been a weak year for this stock. CSCO has been at a C-rated hold for quite some time. The stock gets mostly ok fundamental grades, but reports in with Cs in sales growth, earnings momentum and earnings surprises—three of the big ones in terms of what I like to look at first right now when buying a stock.
And its buying pressure could sure use some improvement, and this latest sales disappointment certainly doesn’t help matters. CSCO receives a B for its Fundamental Grade and a C for its Quantitative Grade.
As of this posting, I consider CSCO a C-rated Hold. Stock buyback program or no, this is simply too risky of an investment right now.
Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!