Cisco Systems Inc. (NASDAQ:CSCO) continues to dominate the market for equipment used to link networks and power the Internet. The company's bread and butter products are routers and switches; Cisco's switch line includes equipment based on Ethernet, Gigabit Ethernet, and ATM technologies. Other products include remote access servers, IP telephony equipment used to transmit data and voice communications over the same network, optical networking components, and network service and security systems. It sells its products primarily to large enterprises and telecommunications service providers, but it also has products designed for small businesses and consumers.
Cisco got hit hard from 2000 to 2002, going from a high of $82 to a low of $8.10. Tech was out of favor. There was heavy competition. Inventories were bulging. Used equipment was for sale cheap from many of the dot com busts. The present and future looked bleak for years. Now those clouds are disappearing and a new era is beginning. Having survived the worst of it, Cisco seems ready to shine once again.
It's the usual reason: earnings. They're improving. In the last quarter, earnings per share [EPS] were 26 cents, beating analysts expectations. Every business segment added to the superior performance. Routing and switching revenues were up 13% and 15% respectively. Advanced technologies rose 23% when excluding the Scientific-Atlanta merger. This segment includes IP phone (Internet Protocol) and video solutions and home networking products. Optical networking climbed 23% in sales.
Like any well diversified company, Cisco relies on several markets for sales and profits. It's not a narrowly defined, niche oriented tech firm. That should add stability if any one or two markets shows weakness. While there's still plenty of risk in any tech stock, Cisco has taken away some of it by diversifying its revenue base.
Toward the end of 2005, Cisco bought Scientific-Atlanta, a manufacturer of digital video recorders, DVR's, and HDTV receivers. At the time, the projections for growth were between 12% and 14%. It's coming in closer to 20% and should remain elevated since recent developments in television technology demand use of both of these devices.
So with all the anticipation of good revenues, where do analysts see earnings going forward? Last year, the company delivered 89 cents a share. For the last 4 quarters earnings have beaten estimates. This year look for $1.30 and next year $1.52. This quarter (announced on Feb. 6) expect 31 cents vs. 26 cents last year in the same period. Over the next 5 years, experts are predicting growth in annual earnings, on average, to be 31.6%.
Cisco is sitting on lots of cash. Most likely it will be spent to buy back more shares (the board recently authorized another $7 billion share buy back, bringing the total to $10.1 billion) and make more acquisitions but nothing as large as Scientific-Atlanta. Until that's fully integrated and results are known, Cisco will stick with smaller additions.
All of this goodness doesn't come cheap. With a p/e of 30 (for the trailing 12 months), investors are aware of the potential here. But if you use a forward p/e, based on the $1.30 estimate, it goes down to 20.5. That's a little closer to comfortable, especially for a company that is expected to grow earnings at more than 30% a year for the next 5. Spending more time with Cisco to see if it fits in your portfolio would be time well spent. Keep in mind as you look at all the positive data that tech is a bumpy road, and investors have a way of dumping quickly if there's any disappointment.
CSCO 1-yr chart
Disclosure: Author has no position in CSCO.