Cisco's Latest Acquisition A New Growth Catalyst

| About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO) announced last week its plan to buy privately held Meraki for $1.2 billion. It's the company's eighth acquisition this year. Fortunately, Cisco has been consistently improved by its acquisitions. The growth stories surrounding them justify their purchase.

Cisco decided in February to buy privately held Lightwire. Lightwire develops advanced optical interconnect technology for high speed application. "Acquiring Lightwire's advanced technology exemplifies Cisco's build, buy, and partner innovation model and supports our focus on driving market leadership in core networking, one of Cisco's five strategic priorities," said Ned Hooper, Cisco's chief strategy officer.

In March, Cisco decided to buy privately held ClearAccess, a company that provides TR-069 based software to service providers for the positioning and management of residential mobile services. "ClearAccess provides a critical technology that will advance Cisco's mission to offer service providers a complete set of tools to manage their networks within the home, across any connected device, and amid the ongoing proliferation in network traffic," said Jamie Lerner, vice president and general manager for Cisco's Network Management Technology Group.

In its third-quarter report, Cisco's cash flows from operations were $3 billion, compared with $3.1 billion for the second quarter of fiscal 2012, and compared with $3 billion for the third quarter of fiscal 2011. Net sales for the first nine months of fiscal 2012 were $34.4 billion, compared with $32.0 billion for the first nine months of fiscal 2011. Quarter three net sales were $11.6 billion, an increase of 7% year over year. Cisco's net income was $2.2 billion, a GAAP increase of 20% year over year. Its earnings per share was $0.40, a GAAP increase of 21% year over year.

Why has Cisco been consistently improved by its acquisitions? The acquisition of Lightwire supported Cisco's data center and service providers as they managed the continuing deluge of network traffic alongside tight capital and operating budget. As for the Clear Access acquisition, it reinforced Cisco's commitment to service providers by accelerating software architecture.

Cisco decided to buy privately held Truvisco in May. The aim of the acquisition was to improve the efficiency of businesses through instant access and visibility of network use and services. "Customers want to be able to tap into and better analyze the enormous volume of data traversing their networks to identify ways to enhance service and generate new income opportunities," said Lerner. Cisco bought Virtuala, a company that provided innovative capabilities for securing virtual machine level information in data centers and cloud environment. The move followed the huge growth of cloud and virtualization, as more and more enterprises adopted computing. With security and isolation more important than ever before, Cisco was gearing up to secure business applications that migrated to virtualized platforms. The giant also bought Think Smart Technologies, which delivers location data analysis using Wi-Fi technology.

Cash flows from operations in the fourth-quarter report were $3.1 billion, compared with $3.0 billion for the third quarter of fiscal 2012, and compared with $2.8 billion for the fourth quarter of fiscal 2011. Cisco's operating income was $2,371, compared to $1,456 for third quarter fiscal 2011. Year 2012 net income was $8.0 billion, an increase of 24% year over year. Quarter four net sales were $11.7 billion, an increase of 4% year over year. The company's net income was $1.9 billion, a GAAP increase of 56% year over year. Its earnings per share was $0.36, a GAAP increase of 64% year over year. Year 2012 net sales were $46.1 billion, an increase of 7% year over year.

Cisco also bought vCidar because it had expertise in the development of virtual network overlay technology for secure data center infrastructure. vCider was integrated into Cisco's Cloud Computing organization and will play an important role in the Cisco Open Network Environment (ONE) strategy, particularly in support of OpenStack. After purchasing vCider, Cisco acquires Cloupia, a company that automated converged data center infrastructure, allowing enterprises and service providers to simplify the deployment and configuration of physical and virtual resources. "Cisco is trying to put value-added software layers on top of its hardware to make their cloud offerings appealing, and it's absolutely necessary to stay competitive," said Colin McNamara, director of data center practice for Nexus IS, a Valencia, Calif.-based managed services provider and value-added reseller of Cisco products.

There is fast growth in the cloud computing sector, so Cisco decided to acquire Meraki, a company that had a history of offering cloud network solutions enabling businesses manage their corporate network using the internet. "At Cisco, we're seeing exceptional growth and adoption across our collaboration cloud offerings. Case in point: More than half of the world's leading service providers have adopted Cisco's HCS (Hosted Collaboration) solution," said O.J . Winge, senior vice president and general manager of the Cisco Collaboration Technology group.

As disciplined investors, we look for comparison to gauge a stock's outlook. Cisco's stock is trading around $18 per share. Its price-to-sales ratio is 2.16, which is competitive when compared to rivals such as Juniper Network (NYSE:JNPR) at 2.02, Intel (NASDAQ:INTC) at 8.75, and the industry average at 1.29. It also trades at a fair price-to earnings ratio of 12.10, which compares favorably with Juniper Network at 48.79 and 17.67 for the industry average. Its earnings per share is superior to its rivals at 1.55, compared to 0.49 for Alcatel-Lucent (ALU), -6.41 for Hewlett-Packard (NYSE:HPQ), and 0.36 for Juniper Network. Its net income is $8.36 billion, compared to -192.91 million for Alcatel Lucent, -12.65 billion for Hewlett-Packard, and 186.97 million for Juniper Network. I recommend buying Cisco, because its acquisitions have improved its bottom line, and I expect the Meraki acquisition to do the same.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.