Optimism High for Cisco Systems, Inc. Before Earnings

Cisco is expecting organic growth to return in 2018

By Dana Blankenhorn, InvestorPlace Contributor

http://bit.ly/2HdpLHO
Optimism High for Cisco Systems, Inc. (CSCO) Before Earnings

Source: Shutterstock

Optimism is high among analysts that Cisco Systems Inc. (NASDAQ:CSCO) will deliver a valentine to shareholders when it reports earnings Feb. 14. They are pounding the table for CSCO stock.

Estimates are the networking equipment giant will deliver 59 cents per share of earnings — and there are hopes of 60 cents — on revenues of $11.82 billion. But to read the commentary accompanying these estimates, even more may be coming.

It’s not all about earnings. Analysts believe CSCO stock will prove a big winner from the Trump tax cut and put repatriated cash back into the company in the form of share buybacks that support the price of remaining shares. On Feb. 13, Cisco had 4.94 billion shares outstanding and a market cap of $200.7 billion.

But this is no Netflix Inc. (NASDAQ:NFLX). Bulls have a price target of $45 per share for CSCO stock, just 10% from its opening price of $40.60 per share.

Silicon Valley Royalty

Cisco is one of those companies that really did change the world, leading the replacement of yesterday’s phone network with today’s internet. Most of the giant telecom equipment outfits it once competed with for carrier contracts have been rolled up into a smaller competitor, Nokia Oyj (ADR) (NYSE:NOK) of Finland.

All that is in the past, however. Cisco is not returning to the heady days at the turn of the century when it was, briefly, the world’s most valuable company, selling at $80 per share and splitting its stock almost annually. Its stock gain of the last year, 28%, was just in line with the NASDAQ average until very recently.

If management wants to keep the stock price rising it might want to increase the dividend when earnings are announced. CSCO stock began paying dividends in 2011, at 6 cents per share (when the shares were at less than $18 each). It now pays 29 cents per share, supported almost twice-over by earnings, and many owners are conservative income investors. But that payout represents a current yield of just 2.86%, close to the 10-year U.S. bond.

With interest rates expected to rise over the next year, the stock will be under pressure unless management offers new buyers growth, something Cisco has not seen in years.

Hopes for growth hinge on its success with a new business model, cloud software, rather than the switching hardware it is known for. Cisco has invested heavily in security, and that has become the star of its show, with growth of 10% expected while the rest of the company remains flat. The move of security from hardware to software should benefit it.

But there are also analysts bullish on its hardware, believing the company finally has a handle on selling to cloud providers with 400 Gbps Ethernet gear, four times the current 100 Gbps standard. Over time, that means less dependence on companies like AT&T Inc. (NYSE:T) for sales, and more on companies like Alphabet Inc. (NASDAQ:GOOGL), which is increasing its own networking footprint and building the undersea cable networks phone companies once built exclusively. Others expect gains from a new equipment upgrade cycle.

The Bottom Line on CSCO Stock

Chuck Robbins replaced the legendary John Chambers as CEO of Cisco in 2015 and his long reinvention of the company as a cloud and security provider is only now taking hold.

Our Tom Taulli says secular trends, software, and a low valuation (for a tech stock) all point to good times ahead for Cisco shareholders. In this, he is in line with other bullish analysts.

For those expecting growth in tech, CSCO stock is a safe choice.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in T.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/optimism-high-cisco-systems-csco-stock/.

©2018 InvestorPlace Media, LLC