Cisco (NASDAQ:CSCO) hit a 52-week low of $42.07 on Feb. 25. Cisco stock hasn’t been this low since December 2018. It doesn’t help that the S&P 500 was experiencing its second consecutive day of 3%-plus losses. As I write this, CSCO is down 27% from its 52-week high of $58.26, which it hit last July.
Is it time to buy Cisco stock on this extended dip?
The last time I wrote about Cisco in December, I discussed the company’s “Internet of the Future” strategy. At the time, I thought it could be the spark that got its share price trending higher. And it was until this latest correction.
I concluded by saying that the introduction of the Silicon One chip series was a step in the right direction for a company to search for organic growth. Two months later, I’ll lean on some of my InvestorPlace colleagues for further insight into Cisco.
By the end of this article, we’ll know whether it’s worth buying Cisco in the low $40s.
Earnings Were a Mixed Bag
Cisco reported second-quarter results on Feb. 12 that included beating the consensus estimate by a penny at 77 cents and exceeding analysts’ revenue estimate by $30 million at $12.01 billion.
Year over year, its adjusted earnings per share rose 5.5% while its revenues were 3.5% lower than a year earlier. It is that last number that moved investors off Cisco stock. It’s also possible the company’s Q3 2020 earnings estimate of 79 cents to 81 cents wasn’t nearly enough for investors, although it does provide a nice sandwich for the analyst estimate of 80 cents.
Although it’s tiresome for shareholders to sit by as revenues continue to move sideways despite the promises for 5G growth in the future, the company’s margins remain strong. In the second quarter, it had a non-GAAP gross margin of 64.7%, 220 basis points higher than a year earlier. In terms of its operating margin, it was 33.7% on a non-GAAP basis, 180 basis points higher than a year earlier.
The Future for Cisco
So, despite the fact it faces short-term revenue declines, it’s still able to maintain higher prices on its hardware. Also, the move from hardware to software is reaping the rewards for the company on the margin front as it transitions to its long-term business strategy focusing on the internet.
As CEO Chuck Robbins stated in the quarterly conference call, 72% of Cisco’s software sales during the second quarter were sold on a subscription basis.
“While we still have a lot more work to do, I firmly believe we have a tremendous opportunity ahead of us. The long term secular growth trends of 5G, WiFi 6, 400-gig and the shift to the cloud remain and we expect to benefit from them,” Robbins said.
“Going forward, we will continue to focus on developing groundbreaking technologies and building a new Internet for the 5G era that will help our customers innovate faster than ever before. I remain incredibly confident that our execution against our strategy will drive profitable growth and generate strong shareholder returns for the long term.”
Robbins, who has been Cisco’s CEO since July 2015 and with the company since 1997, is taking it in a new direction. He believes the results will come, but they will take time.
Attractive Valuation for Cisco Stock
InvestorPlace’s Josh Enomoto recently discussed Cisco concerning its valuation and the so-called earnings disappointment that was Q2 2020.
“The longer-term narrative for Cisco stock is this: the obstacles are temporary, but the opportunities are not,” Enomoto wrote on Feb. 20.
“For instance, the 5G rollout is a crucial spark for CSCO because it specializes in backhaul and core services for mobile carriers. According to Cisco general manager Jonathan Davidson, the existing backhaul network in the U.S. is operating at a ‘really low capacity.’”
Josh goes on to say that the company’s free cash flow generation remains healthy. In the trailing 12 months ended Jan. 25, 2020, Cisco has free cash flow of $14.8 billion, up from $12.9 billion just two years earlier. Based on an enterprise value of $170.2 billion, it’s got an FCF yield of 8.7%. Value investors generally consider FCF yields of 8% or higher.
With long-term debt of $14.5 billion, or just 8% of its market capitalization of $181.3 billion, combined with a 3.4% dividend, there aren’t many tech stocks out there that provide this much protection against the downside while paying you to wait for renewed growth.
As my colleague so ably states, “the price of Cisco stock today represents a discount against future bullishness.”
Until now, I’ve sat on the sidelines. Trading near a 52-week low, I believe now is an excellent time to buy Cisco stock. Should it fall into the $30s, I’d buy some more.
In the meantime, enjoy the healthy dividend rent check it pays.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.