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Summary

  • Valuation is attractive, looking at cash-flow metrics.
  • Very little growth expected over next 3 years.
  • How much time does CSCO's Board give John Chambers?

Cisco (NASDAQ:CSCO), the networking giant and Internet buildout beneficiary of the late 1990's is scheduled to report their fiscal q3 '14 earnings after the bell on Wednesday, May 14th, 2014.

Per the Thomson Reuters consensus, CSCO is expected to report earnings per share of $0.48 on $11.382 billion in revenues for year-over-year (y/y) declines of 6% and 7% respectively.

The revenue estimate has increased from the February '14 earnings report from $11.361 billion to $11.382 billion. The EPS estimate of $0.48 has remained stable since the last earnings report.

CSCO's main issue over the past few quarters has been gross margin (GM) compression, which is supposedly the lowest in years, although we haven't tracked product GM specifically. CSCO's full gross margin has varied from 60% to 65% over the last 3 - 4 years.

We see CSCO's problem as the lack of growth: fiscal 2014 is expected to end with the July '14 quarter and current consensus is calling for a decline in revenues of 4% on a drop in EPS of 1% for fiscal 2014.

Here is our internal tables of CSCO's EPS and revenue growth over the last 18 years:

EPS growth:

EPS growth - actual and est.
2016 eps growth - estimatedn/a8%
2015 eps growth - estimatedn/a6%
2014 eps growth - estimatedn/a-1%
2013 eps growth - actualn/a9%
2012 eps growth -actualn/a14%
2011 eps growth - actualn/a1%
2010 eps growth - actualn/a19%
2009 eps growth - actualn/a-13%
2008 eps growth - actualn/a16%
2007 eps growth - actualn/a22%
2006 eps growth - actualn/a20%
2005 eps growth - actualn/a21%
2004 eps growth - actualn/a29%
2003 eps growth - actualn/a51%
2002 eps growth actualn/a-5%
2001 eps growth actualn/a-23%
2000 eps growth actualn/a39%
1999 eps growth actualn/a27%

Source: internal spreadsheet. 2nd column shows actual and estimated EPS growth using 5/12/14 consensus estimates;

Revenue growth:

rev growth - actual and est
2016 - estimatedn/a5%
2015 - estimatedn/a4%
2014 - estimatedn/a-4%
2013 - actualn/a6%
2012 - actualn/a7%
2011 - actualn/a8%
2010 - actualn/a11%
2009 - actualn/a-9%
2008 - actualn/a13%
2007 - actualn/a23%
2006 - actualn/a15%
2005 - actualn/a13%
2004 - actualn/a17%
2003 - actualn/a0%
2002 - actualn/a-15%
2001 - actualn/a18%
2000 - actualn/a55%
1999 - actualn/a44%

Source: internal spreadsheet 2nd column shows actual and estimates revenue growth using 5/12/14 consensus estimates

The "n/a" column will be completed after the July '14's quarter is reported and we get the new numbers as of the end of the 2014 fiscal year.

The point is you can see the heady growth in the late 1990s, the complete collapse from the tech recession in 2001, and 2002, the re-acceleration in the mid 2000s and then the drop again.

Each time, CSCO's growth rate has peaked out at a lower rate than the previous cycle. This is not a surprise, with mature businesses.

Valuation: CSCO is currently trading at 12x the fiscal '14 estimate of $1.99 and 12x the fiscal 2015 estimate of $2.11 on expected growth this year and next of -1% and +6% respectively.

CSCO's average EPS and revenue growth rate over the next 3 years is 4% and 2% respectively, i.e. not very much.

The cash-flow valuation and the dividend yield is the most compelling aspect to CSCO today: excluding the $45 billion in cash and short-term investments on the balance sheet, CSCO is trading at 6x cash-flow ex-cash, and 15x free-cash-flow, while enterprise value to cash-flow and free-cash-flow are exactly the same metrics.

The 3% dividend yield and the recent hike in the dividend, is compelling too.

The free-cash-flow yield is 5%.

The real question mark remains how long John Chambers remains in his job. John is the only 1990's mega-cap tech executive that remains at the helm of his company. Tech icons like Andy Grove, Bill Gates, Steve Ballmer, Scott McNealy are all gone. Larry Ellison of Oracle (NYSE:ORCL) is still around, but the stock has performed far better than CSCO's too.

While it is easy to take pot shots from the sidelines at CEO's the fact is Microsoft's (NASDAQ:MSFT) stock, one of the last laggards, took off in April '13 after ValueAct, the activist hedge fund took a position in the stock, and investors felt like Ballmer's days were numbered.

The easiest thing in the world is to judge, but I feel like John Chambers has gotten a huge "free pass" from the activist hedge funds and his Board of Director's over the last 14 years, and I wonder how long that continues.

I know CSCO is trying to drive into growth areas, but like all the mega-cap tech giants, their core business is still the 1990's growth drivers, just growing at much slower growth rates.

The problem with buying a value stock like CSCO is that to catalyze the stock it typically takes an outside catalyst like what happened with MSFT to invigorate the stock. So far, it looks like John Chamber's job is secure, and at CSCO it looks like more of the same.

We have a very small position in the stock in one-long term account bought in 1997. It is tempting to buy this value stock, but as of yet we have little reason to do so. It trades today like a broken growth stock.

(click to enlarge)

Source: Cisco Earnings Preview: Trading At 6x Cash-Flow, Ex-Cash, But No Growth Either