As networking giant Cisco (CSCO) prepares to report third-quarter earnings on Wednesday, a solid product backlog and analysts’ low expectations should help CSCO stock to a small bounce.
Analysts expect CSCO to report $11.4 billion in revenue — a 7% drop compared to the same quarter last year. The Street is looking for Cisco earnings of 48 cents per share vs. 51 cents in the year-ago quarter, so a small decline.
But for investors looking beyond this week’s financials, the outlook for CSCO stock is hazier – and very dependent on how well the company can manage powerful headwinds and tailwinds.
The good news is that Cisco CEO John Chambers has been through this rodeo more than once, and has led his company through myriad challenges in the past.
So, can CSCO stock stay strong after earnings? We check out three pros and three cons to decide:
Pros of CSCO Stock
Strong Fundamentals and Manageable Debt: Cisco has cash and equivalents of $47 billion vs. total debt of $17.2 billion, and its current ratio (a measure of liquidity) of 2.65 indicates that CSCO is in a strong position to pay its short-term liabilities, and even generate cash. Moreover, the forward price-to-earnings ratio on CSCO stock of less than 11 is attractive, particularly compared to Alcatel-Lucent’s (ALU) 21.4 and Juniper Networks’ (JNPR) 12.4. And unlike those two competitors, CSCO stock is a great dividend play at a yield of 3.3%.
John Chambers’ Bets on Acquisitions, Internet of Everything: CSCO has cut costs aggressively, fostered a collaborative work environment and is committed to strategic acquisitions including Wi-Fi equipment vendor Meraki, software defined network (SDN) firm Insieme and security expert Sourcefire. Cisco also is staking a very big claim in the so-called “Internet of Things” — machine-to-machine connectivity that can revolutionize the Internet, with Cisco’s own efforts being dubbed the “Internet of Everything.” Chambers believes some 50 billion “things” (everything from cars to toasters) will be connected to the Internet by 2020 — estimating the market value at $19 trillion. Cisco already has ponied up $150 million in IoT startups: Alchemist Accelerator, Ayla Networks and EVRYTHNG. Expect more investments in IoT this year.
The Nexus 9000 Switch: Cisco was late to the SDN party, but the company is attacking that opportunity with fresh fire and an “application-centered infrastructure.” At the core of this data center paradigm shift is CSCO’s new Nexus 9000 series switches, which launched in March. The new launch — the first product since Cisco’s Insieme deal — plays into the strategy of combining virtual and physical networks, making it easier to build new clouds. Also, the Nexus 9000 series makes it easier and more cost-effective for Cisco’s existing router customers to migrate to the SDN vision.