Switch On To Cisco

12/14/2015


  Recent Price
$27
  Dividend
$0.84
  Yield
3.1%
  P/E Ratio
12
  Shares (millions)
5,113
  Long-Term Debt As % Of Capital
26%
  52-Week Price Range
$30.31 - $23.03

Cisco Systems ($27; CSCO) shares fell last month after the company gave disappointing guidance for the January quarter. Cisco, a provider of computer-networking gear, cautioned of soft spending for U.S. companies and sluggish overseas markets. The strong U.S. dollar continues to weigh on international sales, about 47% of Cisco's total revenue. Its largest business, switches, faces pricing pressure, partly due to cheaper alternatives.

Shares have bounced back since the warning, and we see room for them to move higher still. Cisco's management tends to be conservative, and the company enjoys an excellent track record for exceeding expectations. Cisco is a Long-Term Buy.

Business breakdown

Cisco offers steady, if unspectacular, growth. For the 12 months ended October, per-share profits from operations rose 13%, while sales, operating cash flow, and free cash flow all increased 5%. Over the past 24 quarters, a stretch dating back to November 2009, sales have risen in 21 quarters, earnings per share from operations in 19 quarters, and operating cash flow in 17 quarters.

The company has eschewed the big deals many rivals rely on to drive growth. From fiscal 2011 ended July through fiscal 2015, Cisco completed 40 acquisitions for a total of $11.18 billion; just two of the deals were valued at more than $1 billion. Cisco intends to continue this string-of-pearls strategy, announcing four more deals worth a combined $1.93 billion since July 30.

Routers and switches remain a crucial but diminishing part of Cisco's business, combining for 46% of total sales in fiscal 2015, down from 63% a decade ago. In recent years, Cisco has expanded its services business (23% of fiscal 2015 sales), while pushing into such new avenues as digital video systems (7%), data-center equipment (7%), wireless (5%), and security solutions (4%). Its collaboration unit (8%) integrates voice, video, and data.

Cisco returned 73% of free cash flow to shareholders through stock buybacks and dividends in fiscal 2015, followed by 91% in the October quarter — comfortably above its minimum target of 50% of annual free cash flow. Stock buybacks shaved 10% from the share count over the past five years.

The quarterly dividend pays $0.21 per share, up from $0.06 per share when Cisco initiated the distribution in 2011. Cisco's 3.1% yield ranks in the top 20% of dividend-paying stocks in the S&P 1500 technology sector.

Conclusion

Shares trade at 12 times trailing earnings, a 13% discount to their five-year average and 27% below the median for S&P 1500 communications-equipment stocks. The trailing P/E is just nine excluding net cash of $34.49 billion, nearly $7 per share.

Consensus estimates have contracted since Cisco gave its cautious outlook last month. Per-share profits are projected to rise 3% on flat sales in fiscal 2016. Cisco knows how to manage analysts' expectations. In the last 28 quarters, Cisco has topped the consensus profit estimate 26 times and matched it twice.

An annual report for Cisco Systems Inc. is available 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
Oct '15
0.59
vs.
0.54
4%
29.62
-
23.03
13 - 10
Jul '15
0.59
vs.
0.55
4%
30.31
-
26.62
14 - 12
Apr '15
0.54
vs.
0.51
5%
29.99
-
25.92
14 - 12
Jan '15
0.53
vs.
0.47
7%
27.78
-
22.49
13 - 11
           
Year
(Jul.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
49.16
2.21
0.80
30.31
-
22.49
14 - 10
2014
47.14
2.06
0.72
26.49
-
20.22
13 - 10
2013
48.61
2.02
0.62
26.15
-
15.65
13 - 8
2012
46.06
1.85
0.28
21.30
-
13.30
12 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
78
55
79
77
78
16
56

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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