Cisco Earnings Preview: A Dip Could Be a Buying Opportunity

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CSCO stock - Cisco Earnings Preview: A Dip Could Be a Buying Opportunity

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Multinational technology giant Cisco (NASDAQ:CSCO) reports fourth-quarter numbers after the bell on Wednesday, August 15, and I think those numbers could very well meet and/or exceed expectations. But, CSCO stock is trading at an above-normal valuation heading into that report, and as such, management will need to give a robust guide in order to send CSCO stock higher. The chances of that happening are mixed, so the risk-reward on CSCO stock ahead of earnings isn’t great.

But, if this stock drops meaningfully because the guide disappoints, that could be a buying opportunity.

Given improving growth fundamentals through markets like IoT, data centers, the cloud and cybersecurity, I reasonably see CSCO stock being worth $45 today. Therefore, any drops towards $40 are a buying opportunity.

Here’s a deeper look.

Mixed Views Heading Into Q4 Print

Heading into the Q4 print, CSCO stock looks “OK”, but not good or great by any means.

Mainly, this stock has been stuck in neutral since mid-February, and the valuation is way above historical norms — not coincidentally. It increasingly looks like CSCO stock sprinted ahead of fundamentals in early 2018 as investors jumped on board the renewed top-line growth and subscription pivot narrative. After all, that narrative powered several consecutive double-beat quarters, the sum of which sent CSCO stock from $30 to $40 in a hurry in the back-half of 2017.

But, the company’s most recent double-beat quarter was a failure-to-launch situation as the guide didn’t impress.

This tells me that at this point in time and with the current valuation, CSCO stock needs not only double-beat quarters to go higher, but double-beat-and-raise quarters. The “raise” part concerns me because Cisco does not ostensibly strike me as a consistent double-beat-and-raise company.

Granted, growth prospects are improving. The company has a nice long-term growth narrative through exposure to hyper-growth markets like IoT, data centers, cloud, cybersecurity, connected health and smart infrastructure. But, Cisco has been, is today and will remain a low-growth company with good — but not great — margin drivers through a subscription business pivot.

Due to the low-growth nature of the business, the likelihood of successive beat-and-raise quarters against rising Street estimates is not high. Thus, going into the Q4 print, the risk-reward on CSCO stock isn’t great.

Cisco Stock Has Runway To $45

If CSCO stock rallies after Q4 earnings to prices above $45, that is a rally that should faded. The current fundamentals simply do not support pries in excess of $45 today. Conversely, if CSCO stock drops after Q4 numbers to prices below $40, that is a dip that should be bought.

Over the past five years, revenues at Cisco have been stuck in neutral. In 2013, revenues were $48.6 billion. Over the past twelve months, revenues are $48.6 billion.

Despite this low-growth history, investors think that growth is starting to turn a corner at Cisco. Namely, the global explosion of digital data has sparked a global explosion in demand for Cisco’s suite of products. This explosion is expected to catalyze positive revenue growth over the next several years.

But, such revenue growth will likely be small, in the 2-3% range, due to Cisco’s already massive base and other low-growth components. Moreover, while margins are improving thanks to a pivot to subscription revenues, that pivot is progressing at a snail’s pace (recurring revenues were 32% of total revenues last quarter, up just 2 points year-over-year). Thus, long-term margin drivers are in place. But they will take time to materialize.

Bottom Line on CSCO Stock

Big picture, Cisco is a low-single-digit revenue-growth company with healthy, but not robust, margin expansion potential. Under those assumptions, I think Cisco can do about $3.75 in earnings per share in fiscal 2022. A market-average 16X forward multiple on that implies a fiscal 2021 price target of $60. Discounted back by 10% per year, that equates to a fiscal 2018 price target of $45.

Heading into the the Q4 print, CSCO stock looks okay, but not good or great. If this stock rallies towards $50 on good numbers, that rally is likely overdone. Conversely, if this stock drops towards $40 on a bad guide, that sell-off likely overdone, too.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/cisco-earnings-preview-a-dip-could-be-a-buying-opportunity/.

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