Strong, Steady Cisco Wins The Race

7/29/2013


  Recent Price
$26
  Dividend
$0.68
  Yield
2.7%
  P/E Ratio
13
  Shares (millions)
5,387
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$26.15 - $14.96

Cloud computing and tablets threaten corporate empires built on selling expensive software packages or personal computers. Amid the upheaval, investors have found comfort in Cisco Systems ($26; CSCO), which offers steady profit growth and a generous 2.7% dividend yield.

The largest quintile of S&P 500 Index technology stocks as measured by market capitalization has delivered a median 14% total return in the past year, lagging the 32% median of the broader sector, which contains 70 companies. But Cisco has outpaced both groups, posting a 64% total return.

The stock seems cheap at 13 times trailing earnings, a 28% discount to the median for technology stocks and 16% below its five-year average. Cisco is a Focus List Buy and a Long-Term Buy.

Business breakdown

Cisco helps clients handle the demands of higher data traffic. It has delivered consistent growth since the recession, with revenue rising in 14 consecutive quarters and cash from operations climbing in 11 of the past 13 quarters. The company is best known for routers (17% of 12-month sales) and switches (30%), but generates nearly 30% of its revenue from other products. Cisco's higher-margin services unit (22%) has driven growth in recent quarters.

Cisco's solid operating cash flow ($12 billion in the 12 months ended April) and hoard of $47 billion in cash and investments give the company flexibility to make acquisitions, most of which beef up the company's non-hardware businesses. The company spent $6.37 billion on acquisitions in the last nine months and in July agreed to acquire Sourcefire ($75; FIRE), a maker of cybersecurity products, for $2.7 billion in cash.

The networking giant is not immune to the transformation taking place in technology. Its chief challenge could be adapting to software defined networks (SDNs), which allow software, rather than hardware, to control the flow of data transmitted on a network. SDNs help companies react faster to changes in capacity needs and could ultimately deflate demand for Cisco's networking hardware. To its credit, Cisco has made its own investments into SDNs. And Cisco's strong brand built by its legacy hardware has helped it become a top partner for companies deploying SDNs.

Cisco is scheduled to report July-quarter results Aug. 14. The consensus anticipates per-share profits of $0.51, up 9% on 6% higher revenue, a target that leaves room for upside. A serial positive surpriser, Cisco has topped the consensus profit estimate in 19 straight quarters. And its shares have surged by more than 4% on the results in three of the past four quarters.

The quarterly dividend has nearly tripled since Cisco initiated the distribution in 2011, yet the company pays out just 35% of its earnings in dividends. Cisco says it plans to return at least 50% of free cash flow to investors via dividends and stock buybacks. During the nine months ended April, Cisco paid out $2.4 billion in dividends and repurchased $1.8 billion in stock, equating to 52% of free cash flow. An annual report for Cisco Systems Inc. can be obtained at 170 W. Tasman Drive, San Jose, CA 95134, (408) 526-4000; www.cisco.com.

CISCO SYSTEMS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Apr '13
0.51
vs.
0.48
5%
21.98
-
19.98
11 - 10
Jan '13
0.51
vs.
0.47
5%
21.26
-
16.68
11 - 9
Oct '12
0.48
vs.
0.43
6%
19.75
-
15.65
11 - 8
Jul '12
0.47
vs.
0.40
4%
20.16
-
14.96
11 - 8
           
Year
(Jul.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
46.06
1.85
0.50 ‡
21.30
-
13.30
12 - 7
2011
43.22
1.62
0.18
24.87
-
14.78
15 - 9
2010
40.04
1.61
0.00
27.74
-
20.68
17 - 13
2009
36.12
1.35
0.00
25.25
-
13.61
19 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
71
79
81
81
90
80

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   ‡ Includes five quarterly dividends. Cisco pushed a 2013 payment back into 2012, presumably to beat the tax hike.
   NM Not Meaningful.


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