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The Drop of Cisco Stock Has Created a Great Buying Opportunity

Cisco Systems (NASDAQ:CSCO) stock is down 7% since it reported its fiscal first-quarter earnings on Nov. 13. The drop provides a good buying opportunity for astute value investors.

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Cisco reported great Q1 revenue and earnings . But the company said it expects its Q2 revenue to drop 3% to 5% year-over-year.

Cisco provided Q2 earnings per share guidance  of 75 cents to 77 cents, down from 84 cents in Q1.

Cisco Systems stock reacted badly to those forecasts, despite its good Q1 results. This drop, however, provides a good buying opportunity for value investors.

The Weakness of Cisco Systems Stock Has Created a Buying Opportunity

As of yesterday’s close, Cisco stock trades for just 13.3 times its expected earnings. In addition, the company is generating positive  free cash flow. CSCO produces about $10 billion of free cash flow annually. Since the market cap of CSCO stock is $191 billion, its FCF yield is an attractive 5.2%.

Cisco’s dividend will likely not be cut, since its free cash flow is positive. Cisco stock has a very attractive dividend yield of 3.10%.

Moreover, Cisco is still buying back CSCO stock, although at a slower rate than before. In Q1, it spent $800 million on buying back Cisco stock.

Another attractive development is that Cisco paid down its debt by $6 billion in fiscal Q1, reducing its debt outstanding by 25% to $18.5 billion. That will help boost CSCO

 

 

 

 

 

 

 

 

 

stock price, since it will raise the company’s pre-tax earnings by almost 5%.

The Gamesmanship of Guidance

It’s not like Cisco Systems hasn’t provided conservative guidance before. It said it expected its revenue to decline this quarter due to  weaker macroeconomic trends.

One Seeking Alpha author  noted that Cisco has forecast revenue declines in the past, only to exceed expectations when its results came out. Bringing down expectations so as to later beat them is a way to prevent CSCO stock price from completely collapsing when the company’s results come in below expectations.

Cisco Stock Should Still Do Quite Well Over the Next Year

Analysts, on average, are projecting revenue of $51 billion for the year ending July 2020, and $52.5 billion by July 2021. That puts Cisco Systems stock at an enterprise value-to-revenue ratio of just 3.55 times ($181.6 billion divided by 51 billion). That is very inexpensive for a technology stock.

For example, Citrix Systems (NASDAQ:CTXS) stock trades at an EV-revenue ratio of five. Another competitor, Motorola Solutions (NYSE:MSI) trades at an EV-revenue ratio of 4.25. So Cisco Systems stock is quite cheap.

What Should Investors Do?

It’s not uncommon for a stock that disappoints investors, as Cisco recently has, to tread water for a while. I would expect that investors will have some good opportunities to buy Cisco stock at attractive  prices over the next quarter or two.

Cisco  stock has a high 3.1% dividend yield and it its share buybacks continue at this pace ($800 million per quarter), its buyback yield will be 1.7% ($3.2 billion divided by $190 billion). So its total yield will be 4.8% (the 3.1% dividend yield plus the 1.7% buyback yield). That is an attractive return on capital for investors.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review hereThe Guide focuses on high total yield value stocks. Subscribers a two-week free trial.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/cisco-stock-drop-buying-opportunity/.

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