- After the latest drop in its stock price, now is an excellent opportunity for long-term investment in Cisco's stock at a cheap price.
- Cisco's stock is ranked second among all S&P 500 tech stocks, according to Portfolio123's "All-Stars: Greenblatt" powerful ranking system.
- Cisco is generating strong free cash flows, and returns value to its shareholders by stock buybacks and increasing dividend payments.
After reporting better-than-expected results on August 13, Cisco Systems' (NASDAQ:CSCO) stock dropped 2.62% the next trading day in reaction to the company's announcement that it will lay off up to 6,000 workers, or 8 percent of its workforce. In my opinion, the planned layoffs should not have an adverse effect on Cisco's stock price, since the company continues to create new jobs in growing areas. I find CSCO's stock an excellent combination of value and dividend growth stock. Cisco has very good valuation metrics and solid earnings growth prospects. In addition, Cisco achieved a leading position in Gartner's Leaders Quadrant in the Wired and Wireless LAN Access Infrastructure research for the third consecutive year. Furthermore, the company continued to deliver large sums of cash back to shareholders by stock buybacks and growing dividend payments.
Cisco is the world's largest supplier of high-performance computer networking systems. The company was founded in 1984, and is headquartered in San Jose, California.
The table below presents the valuation metrics of CSCO, and the data were taken from Yahoo Finance and finviz.com.
Cisco's valuation metrics are very good. The trailing P/E is at 16.48, the forward P/E is very low at 10.71, and the Enterprise Value/EBITDA ratio is also very low at 7.75.
On August 13, Cisco reported its fourth-quarter and fiscal year 2014 financial results, which beat EPS expectations by $0.02 (3.80%) and beat the Street's estimates on revenues.
Net income in the fourth quarter fell to $2.25 billion, or 43 cents a share, from $2.27 billion, or 42 cents, a year earlier. Revenue in the period that ended July 26 was $12.4 billion, flat year-over-year.
Cash flows from operations were $3.6 billion for the fourth quarter of fiscal 2014, compared with $3.2 billion for the third quarter of fiscal 2014 and compared with $4.0 billion for the fourth quarter of fiscal 2013. Cash flows from operations were $12.3 billion for fiscal 2014, compared with $12.9 billion for fiscal 2013.
In the report, John Chambers, Cisco chairman and chief executive officer, said:
We are executing well in a tough environment and delivered our best non-GAAP earnings per share quarter in our history. I'm pleased with how we are transforming our company over the past several years and that journey continues. We are focused on growth, innovation and talent, especially in the areas of security, data center, software, cloud and internet of everything. Our strategy is sound, our financials are strong, and our market leadership is secure. We have the team in place to deliver and are uniquely positioned to help our customers solve their biggest business problems.
Dividend and Share Repurchase
Cisco has been paying uninterrupted dividends since 2011. The forward annual dividend yield is pretty high at 3.11%, and the payout ratio is at 45.9%. The annual rate of dividend growth over the past three years was very high at 81.7%.
Source: Charles Schwab
Since the company generates lots of cash and the payout ratio is not excessive, there is a good chance that the company will continue to raise its dividend payment.
Cisco returned a record $13.3 billion to shareholders this fiscal year through share buybacks and dividends. In the last quarterly report, Frank Calderoni, Cisco executive vice president and chief financial officer, stated:
We remain committed to delivering value to our shareholders through our capital allocation strategy and continued investment in our long-term growth opportunities.
During the fourth quarter of fiscal 2014:
Cisco paid a cash dividend of $0.19 per common share, or $974 million.
Cisco repurchased approximately 61 million shares of common stock under the stock repurchase program at an average price of $25.11 per share, for an aggregate purchase price of $1.5 billion.
During fiscal year 2014:
Cisco paid cash dividends of $0.72 per common share, or $3.8 billion.
Cisco repurchased approximately 420 million shares of common stock under the stock repurchase program at an average price of $22.71 per share, for an aggregate purchase price of $9.5 billion.
As of July 26, 2014, Cisco had repurchased and retired 4.3 billion shares of Cisco common stock at an average price of $20.63 per share, for an aggregate purchase price of approximately $88.4 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $8.6 billion, with no termination date.
Competitors and Group Comparison
A comparison of key fundamental data between Cisco and its main competitors is shown in the table below.
Cisco has the highest operating margin among the stocks in the group. It has also the highest dividend yield and the second-lowest PEG ratio.
Cisco margins' parameters have been much better than its industry median, its sector median, and the S&P 500 median, as shown in the table below.
According to Portfolio123's "All-Stars: Greenblatt" powerful ranking system, CSCO's stock is ranked second among all S&P 500 tech stocks - only CA Technologies (NASDAQ:CA) is ranked higher. The "All-Stars: Greenblatt" ranking system is taking into account just two factors - Return on Capital and Earnings Yield (E/P) in equal proportions. Back-testing has proved that this ranking system is one of the best free available ranking methods. I recommend investors read Joel Greenblatt's book "The Little Book That Beats the Market", where he thoroughly explains his system.
The charts below give some technical analysis information.
CSCO stock price is 3.77% below its 20-day simple moving average, 2.59% below its 50-day simple moving average, and 7.03% above its 200-day simple moving average. That indicates a short-term and a mid-term downtrend, and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.02 and descending, which is a bearish signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 53.17, which does not indicate overbought or oversold conditions.
Many analysts are covering the stock, but their opinion is divided. Among the forty-three analysts, nine rate it as a Strong Buy, sixteen rate it as a Buy, twelve rate it as a Hold, five analysts rate it as an Underperform, and one rates it as a Sell.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering CSCO stock, there are 21 analysts who have a four or five-star rating, sixteen of them recommend the stock, and the other five top analysts rate it as a Hold.
On August 14, Morgan Stanley's analyst James Faucette maintained an Overweight rating and a $30 price target on Cisco. In a note to clients, Mr. Faucette stated that Cisco's orders and enterprise growth are compelling, and demand for new products continues to build out.
On August 13, during a conference call discussing its fiscal fourth-quarter earnings, Cisco said that it will lay off up to 6,000 workers, or 8 percent of its workforce, as part of a restructuring. Cisco spokesman John Earnhardt emphasized that the company is cutting in some areas so it can add in others, and that the net headcount year-over-year won't change. Cisco's total headcount is up over the past five years by about 8,000 people.
Cisco has not specified which kind of jobs it will cut. However, analysts assume that the job cuts will likely be concentrated among sales and marketing staff in former growth markets where sales momentum is waning, including in parts of Asia and Eastern Europe. Cisco encounters intense competition in those areas from Huawei Technologies, China's biggest maker of networking equipment. In my opinion, the planned layoff should not have an adverse effect on Cisco's stock price, since the company continues to create new jobs in growing areas, including software, security, and data center, in order to maintain its leadership.
According to a press release from June 26, industry research firm Gartner placed Cisco in the Leaders Quadrant of its 2014 Magic Quadrant for the Wired and Wireless LAN Access Infrastructure.
In response to Gartner's release, Sujai Hajela, senior vice president of Cisco Enterprise Networking, said:
Cisco continues to innovate in wired and wireless LAN technology and believes that our positioning in the Leader quadrant by Gartner for the third consecutive year is a confirmation of our strategy and business performance.
In my opinion, achieving a leading position by Gartner research in the Wired and Wireless LAN Access Infrastructure for the third consecutive year demonstrates Cisco's innovation strength and its strong growth prospects in this business.
Cisco has been able to show an earnings per share surprise in each one of the last four quarters, as shown in the table below.
In my opinion, the fact that the company succeeds to beat analyst expectations quarter after quarter demonstrates the strength of its business, and there is a good chance that Cisco will continue to surprise by reporting better-than-estimated results in the future.
CSCO's stock has been doing well this year. Since the start of the year, CSCO's stock has gained 8.9%, while the S&P 500 index has risen 5.8% and the Nasdaq Composite Index has increased 6.9%. However, in the years 2012 and 2013, CSCO's stock significantly underperformed the market. Since the beginning of 2012, CSCO's stock has gained only 35.1%, while the S&P 500 index has increased 55.5% and the Nasdaq Composite Index has risen 71.4%. Nevertheless, considering its good valuation metrics and solid earnings growth prospects, CSCO's stock, in my opinion, has plenty of room to move up.
Cisco has very good valuation metrics and solid earnings growth prospects. Its Enterprise Value-to-EBITDA ratio is very low at 7.75. Moreover, CSCO's stock is ranked second among all S&P 500 tech stocks, according to Portfolio123's "All-Stars: Greenblatt" powerful ranking system. In addition, Cisco achieved a leading position by Gartner research's Leaders Quadrant in the Wired and Wireless LAN Access Infrastructure for the third consecutive year. Furthermore, Cisco is generating strong free cash flows, and returns value to its shareholders by stock buybacks and increasing dividend payments - during fiscal year 2014, share repurchases were about $9.5 billion.
All these factors bring me to the conclusion that CSCO stock is a smart long-term investment. Furthermore, the rich, growing dividend represents a gratifying income.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.