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Is Cisco Systems, Inc. (CSCO) Stock a Buy or Sell Ahead of Earnings?

CSCO stock looks like a solid enough pickup, but it would be even more attractive on a pullback

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Cisco Systems, Inc. (NASDAQ:CSCO) will report earnings Wednesday after the close, and longs are hoping the results are enough to keep up Cisco’s market-beating 2017. So far this year, CSCO stock is up more than 13%, and it’s almost 30% better over the past year.

Cisco Systems, Inc. (NASDAQ:CSCO)
Source: Shutterstock

Despite the rally, Cisco shares still yield an impressive 3.4%.

Cisco is in the midst of a multi-year “transition.” I say transition instead of turnaround because its business isn’t bad, per se … it’s just that it can’t boast much in the way of growth at the moment. That’s illustrated by analysts’ expectations for sales to fall 1.8% this year and grow just 2.3% in 2018. Essentially, 2018’s revenues will be almost flat compared to 2016’s results.

Earnings aren’t much better, with expectations for sub-1% EPS growth in 2017. Next year, though, analysts expect profits to improve by 5% and accelerate after that. Current estimates calls or 10% annual EPS growth over the next five years.

Admittedly, Cisco CEO Chuck Robbins is positioning the company in higher growth markets, rather than just networking and switches. Without abandoning Cisco’s legacy business, Robbins is looking at areas such as artificial intelligence, the cloud and cybersecurity.

Without larger acquisitions, these areas will likely represent fast growth but a small drop in the bucket overall due to Cisco’s size.

At least in the short-term.

So What Do We Do With Cisco?

Cisco is a great stock to own — if you’re already long. CSCO stock has not only climbed by double digits so far in 2017, but it has digested much of that rally and worked off its overbought condition. Strong price action, consolidation and yield are all attractive components.

Fundamentally, I also like Robbins’ focus on adding new growth segments, as well as the company’s nearly $72 billion in cash and short-term investments, which give Cisco many options to make growth-oriented decisions (read: M&A kindling).

In a way, Cisco stock reminds me of Apple Inc. (NASDAQ:AAPL). Yes, the former doesn’t sport nearly the growth prospects of Apple … but it does have a low valuation, tons of cash and is seeking out new growth markets rather than just sitting on its hands.

Cisco’s valuation isn’t astonishing, but it’s certainly on the low end; CSCO stock trades at 13 times forward estimates.

But as long as those estimates are low, Cisco is very much a “show me” stock.

Like I said, Cisco is a great stock if you already own it. That makes it a very solid “hold.” As for the buy or sell? I wouldn’t do either. At least not yet.

Trading CSCO Stock

Let’s take a look at the charts to figure out some important levels.

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