Cisco Systems, Inc. (CSCO) Stock a Better Buy After Earnings Beat

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CSCO stock - Cisco Systems, Inc. (CSCO) Stock a Better Buy After Earnings Beat

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Cisco Systems, Inc. (NASDAQ:CSCO) faced a lot of apprehension on Wall Street ahead of its fiscal third-quarter earnings report, but it looks like the worries were overblown. Cisco earnings trumped Wall Street’s expectations, and shares were surging by 6% in Wednesday’s after-hours trading.

Cisco Systems CSCO stock

For new money, or investors looking to increase their stakes, Wednesday’s report is an all-clear.

Cisco Earnings

Cisco’s Q3 earnings beat in just about every way they could.

CSCO brought in 57 cents per share in adjusted profits on revenues that grew 3% year-over-year to $12 billion, topping the analysts’ calls for earnings of 55 cents per share on sales of $11.97 billion.

Current-quarter earnings guidance was encouraging, too, with Cisco projecting Q4 profits in a range of 59 cents per share to 61 cents, with every bit of the range beating the Street forecast for 58 cents.

In the Cisco earnings press release, CEO Chuck Robbins admitted that the current IT environment remains “challenging.” Of course it is. Global growth has slackened, and uncertainties such as a possible “Brexit” and the U.S. presidential election has many businesses on edge.

Customers have been hesitant — no surprise there — though the impact has been harder on smaller players, such as FireEye Inc (NASDAQ:FEYE) and Tableau Software Inc (NYSE:DATA).

So why has CSCO been so resilient?

Strengths and Weaknesses in CSCO Stock

Cisco has been pulling off a major transformation of its business that’s finally starting to pay off. CSCO has been moving toward software — which enjoys higher margins and growth rates — as well as subscription business models that provide more stable, predictable revenue streams. Meanwhile, Cisco has unloaded less fruitful ventures such as its SP video customer premises equipment business.

Another factor that should continue to boost CSCO stock is the company’s savvy M&A strategy. In the latest quarter, the company acquired Jasper Technologies (a player in the fast-growing Internet of Things market), Synata (a provider of search technologies for the cloud) and CliQr (a startup that helps companies manage hybrid cloud environments).

Now, Cisco isn’t entirely in the clear. For instance, the company’s core switching gear business has been lackluster, with that division suffering another down quarter with 3% revenue declines for Q3. You can chalk that up to tough rivals such as Arista Networks Inc (ANET), as well as operators in Asia.

But CSCO has the benefit of a diversified portfolio of offerings, and the balance appears to be working there.

Investors looking to get in don’t need to be discouraged by the higher prices they’ll be buying at on Thursday. CSCO stock still sports a reasonable valuation of 11 times next year’s earnings.

Not to mention, Cisco still offers one of the best dividends in technology, yielding roughly 3.9% on a payout ratio that’s well less than half the company’s projected earnings for next year.

Cisco won’t be trading at as much of a discount as it was before Wednesday’s close, but it’s still a good long-term buy for anyone who isn’t in yet or wants to add shares.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/csco-stock-cisco-systems-earnings-q3/.

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