In light of the bearish response to last quarter’s earnings results and the current-quarter outlook from IBM (IBM), in addition to what was mostly a lackluster quarter from Apple (AAPL), it wouldn’t be tough to presume tech-sector peer Cisco (CSCO) is in the same leaking boat IBM and Apple are in.
That presumption would be wrong, however. Cisco reported its fiscal second-quarter numbers Wednesday night, and not only were they better than expected, they were downright good.
Granted, the growth Cisco achieved last quarter was largely driven by acquisitions. But that’s not the point. Those acquisitions are bearing fruit in that they’re allowing Cisco to build a better proverbial mousetrap.
Despite the sharp post-earnings jump from CSCO stock, this company may still be a compelling diamond in the rough for shareholders seeking an undervalued opportunity.
Cisco Earnings
Last quarter, the networking technology giant earned 57 cents per share on $11.8 billion worth of revenue. Analysts were only calling for a bottom line of 54 cents per share of CSCO and a top line of $11.75 billion. Better yet, the company pumped up its earnings from the year-ago profit of 53 cents per share, and sales grew a respectable 2% on a year-over-year basis.
Product revenue was solid, led by growth in its security division — security sales were up 11%. Routing was also a bright spot. However, wireless products and switching — a huge component of its revenue mix — were down revenue-wise last quarter.
Cisco CEO Chuck Robbins said of last quarter’s report:
“We delivered a strong Q2, and are managing the business extremely well in a challenging macro environment. We’re managing the company on two fronts. We’re focused on continued strong execution in the near term while investing in the innovation to lead our customers into the future.”
The market didn’t disagree, pushing Cisco stock higher to the tune of 8%.
Looking ahead, the company offered earnings guidance for fiscal Q3 of between 54 cents and 56 cents per share, on the heels of revenue growth of between 1% and 4%. Analysts were only looking for an average per-share profit of 54 cents, and had even projected a slight dip in year-over-year revenue.
The Buying Spree Is Paying Off
It’s difficult to see simply because Cisco is so big and the (relative) change is so gradual, but Cisco is in step with the broader transition in the technology market.
That paradigm shift makes hardware a little less important to Cisco, and makes software a lot more important. The shift also happens to be one that makes Cisco more competitive in the cloud-computing arena, where hardware is largely becoming virtualized with software.
The recently-announced acquisition of Internet of Things (IOT) outfit Jasper is a microcosm of this transition. CFO Kelly Kramer explained in an interview with Barrons reporter Tiernan Ray:
“Jasper was very important to us. We looked at how enterprises are building next-generation mobile, IoT, Web, and cloud applications, and we saw they are building them natively on container-based stacks that will actually take in the data and leverage the APIs that com out of Jasper. Jasper allows us to provide a tremendous amount of visibility into that, with very unique capabilities to bridge between enterprise and service provider, to leverage the insights and see the whole flow from the connected car, say, to the carrier’s network, and back into the enterprise data center.”
And Jasper is hardly the only deal that better equips Cisco to compete in a world where services, wireless and security will eventually mean more than switches and routing do. Robbins has directed the acquisition of a total eight companies in just the past six months, each of which ultimately give Cisco a better cybersecurity, cloud computing, or video-streaming management tools. They’re all three the technology world’s biggest hot buttons.
These deals have allowed Cisco to post earnings and sales growth at a point when not every company is doing the same.
Bottom Line for CSCO
The results prompted the predictable bevy of buy recommendations. Though they were all after the fact, they may not be wrong. Even in the shadow of Thursday’s 8% surge, CSCO stock is still only trading at a plausible forward price-earnings of 10.3, and there’s little doubt Cisco is assembling the right kind of technology menu.
That being said, it may have been Jefferies analyst George Notter who offered the most salient observation with his upgrade of CSCO to a “buy.” He explained:
“Our upgrade is driven, in part, by our view that the downside in the stock is limited (we realize this is a counter-intuitive point of view in the current environment). Key elements of this perspective: 1) the stock is trading at historically cheap levels – 6.4x our base business 2017 EPS projection; 2) we believe the company – in the event of a more significant macroeconomic slowdown – will protect earnings power by managing their cost structure aggressively; 3) the dividend increase – just raised with last night’s EPS conference call – also helps set a floor for the stock; 4) our concerns about the company’s BRIC-M exposure are reduced – the January results showed growth in these areas of the world; and 5) the risk around the January EPS print is behind us.”
Makes sense. You could certainly do a lot worse than owning Cisco stock right now.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
