Seeking Alpha
Large-cap, event-driven, value
Profile| Send Message|
( followers)  

Executive summary:

  • Cisco showed dismal performance during the first six months of the current fiscal year, which sets the stage for a very tough fiscal year.
  • However, there are few things that points towards the fact that the company's long-term fundamentals are not only intact but also are improving.
  • The company is currently trading at a PE of 15 and offers a dividend yield of over 3%.
  • As the growth is out of the business, the valuations demand caution. However, any positive development may make these valuations look very attractive.
  • Discussed below is the brighter side of company's performance during the last six months.

_________________________________

In my last article on Cisco (NASDAQ:CSCO) I discussed the near-term uncertainties (uncertain emerging market outlook, slowdown in service provider market, and product transition issues) that may hurt the company's performance going forward. However in between all these uncertainties, there are few things (discussed below) that points towards the facts that:

  • The company's long-term fundamentals are very much intact and improving.
  • The company is using this phase of weakness to improve its competitiveness.
  • Most of its strategies are progressing well.
  • The company is focusing more on the investors' return.

Acquisitions are performing well:

One of the key growth strategies of the company is to grow through acquisitions. The company is a known acquirer. In-fact, during the last few years, the company has been making nearly one acquisition each month (on an average).

Despite the dismal performance by the company during the last two quarters, the two big acquisitions that the company made in the recent past showed exceptional performance. Meraki, which the company acquired for $1.2 billion in cash, showed over 100% growth during the last quarter. The good performance of Sourcefire, which company acquired for $2.7 billion, was the prime reason behind the healthy performance of Security segment during the last quarter. The success of the two big acquisitions means that the company's acquisition strategy is working well.

So, the company may well continue with its aggressive acquisition strategy that can compensate for the revenue de-growth in the core businesses in the long run.

Architectural Solution:

Another key long-term strategy of the company is to offer solutions rather than just products. The company wants to do so because this strategy allows it to use its core strength (hardware products) to drive its future growth possibilities (software and services offerings).

Architectural approach means that the company is offering complete solutions by offering solutions with hardware and software products clubbed together. This approach allows the company to cross sell its products from different product segments, and also allow it to tap the true potential of its software and services offerings (future growth opportunities) along with its hardware products (core strength).

The company's strategy is working well, which is evident from the fact that some of its newly introduced products that are part of its strategy are performing very well. For example, the order booking for Nexus 9000 nearly tripled with-in the last reported quarter. The company is confident about the success of this strategy, and is progressing well.

As mentioned by the company:

"We believe our focus on architectures is really paying off."

Focusing on the new opportunities:

Since the last two quarters the company has been going through some tough times due to the sluggishness in the emerging markets, and slowdown in the service-provider market. The company is reacting to the situation by shifting its focus to the new growth segments. For example, the company recently enter into DaaS (desktop as a service) market. This shows that the company is already focusing more on the other/new markets/segments to cover the revenue shortfall that the company may well continue to experience from the traditional markets, particularly the service providers market.

Cost cutting:

The company is well aware of the fact that the company is going through a tough phase (as far as growth is concerned), and that is why the company is focusing on operational excellence and disciplined cost management, which the company is managing well.

As said by the management:

"We managed non-GAAP operating expenses very well this quarter, decreasing 9% as we focus on cost management and productivity."

This focus on cost management has been making it sure that the company margins stays health despite revenue de-growth during last two quarters.

Focusing more on the investors' return:

The company considers investors' return as one of its top priorities, which is one of the key things from an investor's point of view.

At the beginning of fiscal 2013, the company announced its intent to return a minimum of 50% of its free cash flow* annually to shareholders through dividends and share repurchases. The company met its goal by returning $6.1 billion to shareholders during the fiscal year. The good news is that for the current fiscal the company intends to return in excess of over 100% of its free cash flow. The company has already increased its quarterly dividend to $0.19 per share.

*The company defines free cash flow as net cash provided by operating activities less cash used to acquire property and equipment.

Conclusion:

The lackluster performance of company during the first two quarter sets the stage for a very tough year for the company. Slowdown in service provider market and uncertain emerging market outlook are two concerns that may continue to hurt Cisco in the near-term. However, the continuous success of company's strategies, acquisitions, and its entry into the new markets could well bring back the company to growth path in the medium to long run.

Cisco's stock price is going through a considerable volatility since the last six months due to the sudden change in business environment that made the company to report dismal results and weak outlook. The company is currently trading at PE of 15 and offers a dividend yield of over 3%.

Considering the fact that the near-term issues are very much intact these valuations demands a caution, but on the other side any positive development (like better results or guidance) may make these valuations look very attractive, as the long-term fundamentals are not only intact but also are improving, and the dividend yield is already attractive enough.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Source: Cisco: The Brighter Side