Cisco: Is It A Buy Ahead Of Earnings?

May.14.14 | About: Cisco Systems, (CSCO)

Summary

Networking giant reports 3rd quarter results after the market closes today.

Price target, Estimates, and Dividends provide the fundamental backing.

Technicals suggest short term bottom is near as well.

Cisco Systems (NASDAQ:CSCO) will report its 3rd quarter results after the market closes on 5/14/14. The company has been under pressure for quite some time and revenues are still expected to be under scrutiny in the upcoming results as well.

While it is easy to be bearish on Cisco and in general the "old-tech" companies, this article presents a few positives that investors might want to know ahead of Cisco's results. It is up to the reader to decide whether to buy the stock ahead of the earnings or wait for a pullback post earnings to pick up a higher yield. Let us get into the details.

Price Target: Morningstar, the website that value investors hold so dear, has an average price target of $26 for Cisco. That represents nearly 13% upside from the current share price of $23. Add in the hefty 3.30% yield, returns are likely to be impressive.

Recent Estimates: Since we are looking at earnings, it is worth taking a look at analyst estimates as well as the company's recent earnings history. Both augur well for Cisco. Analyst estimates have remained fairly steady over the past 3 months, with slight upside revisions as well. Most companies have had their EPS estimates slashed over this same time period.

(Source: Yahoo Finance)

Earnings History and Valuation: Cisco has a long history of beating EPS estimates as the table below shows. While the beat margins haven't been huge, it does help to know estimates are at least likely to be met.

  • If EPS does come in at the expected 48 cents per share, that will take Cisco's trailing twelve months EPS to $2.00. Basic math gives Cisco a trailing PE of just 11.50 based on current share price of $23.
  • To put that PE into perspective, fellow "old tech" Intel Corporation (NASDAQ:INTC) has a PE of 14.
  • And let us not forget the company's huge cash hoard of $47 billion. Repatriation taxes or not, $47 billion in cash for a company with a market cap of $117 billion provides some cushion for investors.

(Source: Yahoo Finance)

Dividends:

  • Cisco's primary attraction for investors these days seems to be its dividend and rightly so. With a payout ratio of 50% and earnings expected to grow at 8%/yr over the next 5 years, investors can expect many more dividend increases.
  • The company has now put together 3 consecutive annual dividend increases: in April 2012, April 2013, and April 2014. This trend is likely to continue given the reasons above.
  • With Intel disappointing investors when it comes to dividend growth and Apple (NASDAQ:AAPL) already showing signs of slow dividend growth, Microsoft Corporation (NASDAQ:MSFT) and Cisco are the two choices left (in tech) for investors seeking high dividend growth that is sustainable.
  • If the stock pulls back tonight after earnings, investors are likely to get a yield of 3.50% or more.

Technical: With the market reaching all time highs repeatedly, many stocks are naturally in the over-bought category. Cisco is one of the few value stocks near the oversold level. The RSI stands at 34 as of this writing as shown below.

Click to enlarge

Conclusion: This stock's undervalued theory has been out there for quite some time, as evidenced by this piece on Seeking Alpha. Do you believe in it ? Or do you believe Cisco needs its own Satya Nadella to bring some life back into the company and the stock ?

We will be closely monitoring the results and pull the trigger if the yield appears enticing enough post earnings.

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

Business relationship disclosure: The article was written by Tradevestor's analyst. Tradevestor is not receiving compensation for it (other than from Seeking Alpha). Tradevestor has no business relationship with any company whose stock is mentioned in this article.