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Cisco Systems (NASDAQ:CSCO) had an interesting year - the stock went up 29% in the first eight months of the year before pulling back and ending the year with a gain of 11%. The reason for the fall in the price was the announcement by the company about a fall in the revenues for the current quarter. Cisco announced that the revenues are likely to fall by about 8-10% for the fourth quarter due to lower telecom sales and poor performance in the emerging markets. As a result, most of the analysts lowered their price targets prompting a rapid fall in the stock price. However, I believe the fall is short-term as there are no long-term concerns for the company and the stock price will continue to show an upward trend in the long-term.

CSCO Chart

CSCO data by YCharts

Cash Flows Are Extremely Strong

Cisco's free cash flow in the last year was $11.73 billion, showing an increase of 13.2% compared to the free cash flow of the same period last year. Furthermore, the company's free cash flow increased by 31.7% over a two-year period. The growth in the free cash flows has been extremely impressive for the company. This growth will have a twofold affect for the investors: first, the company plans to take its payout ratio close to 50% of its free cash flows which means as the free cash flow increases, so will the dividends. At the moment, the payout ratio based on free cash flows is close to 30%.

However, the company is buying back its shares every year and returning some cash to its shareholders through buybacks. Net buybacks (shares repurchased minus new stock issues) for the trailing twelve months are $823 million. Payout ratio including the net buybacks goes up to 36%. There is still a lot of room for the company to grow its dividends and return more cash to its shareholders. The company's current part of long-term debt and other obligations which the company has to pay within a year was $8.18. As the cash flows of the company are strong, I do not believe debt will be an issue for Cisco.

Possibility of increased dividends

As the free cash flows of the company are increasing year-over-year, the current part of the debt and other obligations are decreasing. Over the next two years, Cisco has an obligation of $4.54 billion for its debt commitments, an amount that is substantially lower than the current year figure of over $8 billion. As a result, free cash flows are expected to be even better in the coming two years. The company could also use this cash for capital expenditures which would allow the company to grow its revenues. Cisco's total long-term debt stood at $16.2 billion at the end of the last year, and in the trailing twelve months, it has come down to $12.9 billion. Usually the older debt is replaced with new debt issue in order to maintain a certain capital structure. Below table shows the debt payments that the company has to make over the next five years.

Payment due by period

Less than 1 year

1 to 3 years

3 to 5 years

Amount

$8,176

$4,541

$1,421

Emerging Markets

India is a huge market for Cisco and it is expected to grow over the next three-five years. Currently, Cisco holds 60% of the market share in the telecom network infrastructure. In 8 out of the 10 segments of the networking industry of India, Cisco is the market leader. Although voice segment have flat growth rates, data services is expected to show robust growth. Over the course of 5 years starting from 2012 to 2017, data services industry is expected to grow 60 folds. Since Cisco's market share in India is 60%, the revenues of Cisco will grow substantially from the Indian data services market in the coming years. In the last fiscal year, Cisco recorded 37% expansion in the Indian market. Besides data services, Cisco has 75% market share of ENT routers which account for 20.3% of Cisco's revenue.

While the growth rates in the Indian market are impressive the risk of exchange rate may cloud the growth rates. Indian rupee has been falling which will cause the consolidated revenues and cash flows to be lower for the company. Furthermore, the Chinese market is not completely stable after it came out that the U.S. agencies were monitoring the internet data transmitted through Cisco's equipment. The blow from the Chinese market may not prove to be as big as it was thought; however, it did have an impact on the stock price. Despite these bumps over the past three months, the prospects are good for the company. These markets have a lot of potential to grow, which supersedes this threat and the company can still gain huge revenue growths from this segment.

Conclusion

Cisco has an impressive growth rate of 8% in the relatively mature North American market. However, the emerging markets may prove to be even bigger growth drivers for the company. As I said above, the price fall will be short-term in my opinion and it may have given an opportunity to the long-term investors to add to their position. The fundamentals are strong, the cash flows and revenue is growing at an impressive rate and the company is growing its dividends. I do not believe the long-term investors should panic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: Cisco Systems: There Are No Long-Term Concerns