Cisco Systems, Inc. Is a Machine for Growing Revenue

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CSCO - Cisco Systems, Inc. Is a Machine for Growing Revenue

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As big as Cisco Systems, Inc. (NASDAQ:CSCO) is becoming by market cap, the stock is still roughly half where it was before the dotcom bubble crashed in the year 2000. Most investors who lost money back then probably gave up when the stock bottomed out at around $15 a share in the 15 years that followed. The astute investors who found value in the networking giant are getting rewarded again: Cisco reported strong second-quarter earnings and raised its Q3 guidance.

CSCO Stock Earnings Highlights

On February 14, Cisco reported $3.1 billion in net income (non-generally accepted accounting principles), up 3% from $2.9 billion last year. Earnings rose 11% year-over-year to 63 cents per share.

Management took two extra steps in boosting shareholder returns. First, it raised its quarterly dividend by 14% to 33 cents per share. Second, it boosted its share buyback by $25 billion, to $31 billion.

 

Cisco through the decades:

Cisco (CSCO)

 

 

 

 

 

Recurring revenue made up one-third of total revenue. This is a solid number that value investors will like. It gives the company an inflow of cash, which then allows Cisco to make acquisitions, invest in itself, or give the excess cash back to shareholders. Since it elected to return money back to shareholders, investors should expect Cisco making only small acquisitions, if any at all.

For the third quarter, Cisco forecasts growing revenue by 3-5% Y/Y. The 23 analysts, who have an average price target of $42.86 (and in the range of $37-$52), will have no choice but to raise this. Wall Street collectively models revenue growing only 0-2%.

 

 

 

Source: Tipranks.com

This is understandable: Cisco is a massive company, so growing at 5 percent is both staggering and unexpected. Cisco has room to grow revenue because of the size of its deferred revenue recognition. As subscription-based revenue become a bigger part of the business, CSCO stock will only go up.

On its conference call, Executive Charles Robbins explained the power of subscriptions:

“We continued to drive momentum in our intent-based networking portfolio and saw strength across the business. We made continued progress in shifting more of our business towards software and subscriptions. This performance led to strong margins, solid cash flow, and double digit non-GAAP EPS growth. We are clearly seeing the results of the strategy we’ve articulated to you over the last ten quarters.”

Source: Seeking Alpha Transcript

CSCO Stock’s Balance Sheet

Cisco closed recently at $42.09. At a forward price-earnings ratio of 16 times and a price/earnings to growth ratio of 2.43 times, the stock has room to expand to an 18-20x forward P/E or a 2.5-3.0x PEG. That would imply a stock price of $50 a share. A five-year DCF Revenue Exit model  would peg Cisco’s fair value is $45.74 per share. This assumes revenue growing by 4-5% over the next five years and uses a discount rate of between 7.5-9%.

Look closely at Cisco’s balance sheet. The company has a large net cash balance. Its dividend rose recently but that will continue in the quarters ahead, due to the high free cash flow yield. Management is doing a good job in handling the declining switch business.

Nokia Corporation (NYSE:NOK), which pivoted its business toward 5G networking solutions, is up 16% in the quarter after reporting strong Q4 earnings on February 1. Nokia forecast a recovery in its network business, helped by patent payments. In the last quarter, the company received a catch-up patent payment of $262 million from Huawei Technologies Co., Ltd. The ramp up in 5G will give Nokia’s patent licensing business a sales growth of around 10% over the next two years.

Bottom Line on CSCO Stock

Cisco Systems is proving it is a core holding for any value investor in the tech space. The company is in the sweet spot of the technology boom. It supplies the pipeline that networks need to run. And as demand for higher bandwidth and speed grow, Cisco will benefit.

Disclosure: The author owns shares of Nokia Corporation.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/cisco-systems-inc-csco-stock-machine-growing-revenue/.

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