Cisco: Out To Prove That It Can Grow And Reach $30

| About: Cisco Systems, (CSCO)

I received quite a bit of criticism recently for suggesting that networking giant Cisco (NASDAQ:CSCO) was not only on the verge of regaining its status as a Wall Street darling, but was also heading to a $30 share price. What prompted me to make the comment was the fact that the company has recently put together a string of earnings releases that have beaten estimates for three consecutive quarters. However, to some, that continues to not be enough.

The quarter that was

In its most recent quarter which ended January 28, Cisco reported net income that climbed 44% and arrived at $2.2 billion, or 40 cents per share. This compares with earnings of $1.5 billion, or 27 cents per share year-over-year. If you factor out that the costs associated with stock-based compensation as well as some acquisition-related amortization, the company actually earned 47 cents per share - 4 cents per share above analysts' expectations based on polls by FactSet. Revenue was $11.5 billion, up 11% from $10.4 billion a year ago and compares favorably to the $11.2 that was projected.

Where's the growth?

I think that is what analysts continue to ask. As impressed as I am with the report, there continues to be many who are simply unwilling to give the company much (if any) applause for what continues to be a remarkable turnaround from the depths of last summer where Cisco showed little focus whatsoever. Its results clearly demonstrate the company is keen in improving its margins as it reported gross margin that improved a full point from the previous year while also exceeding analyst estimates. However it seems that area of performance is not growing at a rate that appeals to the most ardent bears - at least to the extent where it can prove that it can reclaim some of the market share that it has lost to the competition over the years.

Though the company reported 7% growth in orders, it did however symbolize a decrease from the precious quarter where orders climbed to 13%. It seems that competitors such as Juniper (NYSE:JNPR) and Riverbed (NASDAQ:RVBD) fared moderately better in that regard, though it continues to outperform Hewlett Packard (NYSE:HPQ). For me, I think the company is doing exactly what it needs to in order to get back on track especially when considering its operating income, where it reported better than 60% growth and nearly 29% growth on an adjusted basis. By and large, the resonating question continues to be can it continue to do enough to get the bears onboard or (at the very least) send enough of them to hibernation?

More reasons for optimism

During the conference call, the company was extremely candid about its interest of more acquisitions. There aren't many companies like Cisco with the cash reserves to make such considerations, but I continue to grapple with whether or not this is a good idea. For it to make such a statement leads me to think that it has already started assessing which deals make sense and which ones don't. But as I have said previously, if it is truly thinking about an acquisition it needs to think about Brocade Communications (NASDAQ:BRCD) - it would be reasonably priced and the synergies are there. If nothing else, it would be a perfect defensive move to keep it out of the hands of rival Dell (NASDAQ:DELL). But this is just one area to look forward to.

CEO John Chambers announced that he expects revenue in the current quarter to jump 5% to 7% while also expecting earnings, excluding items, of 45 cents to 47 cents per share. Furthermore, the company said it will raise its quarterly dividend on the one year anniversary of its first pay. The company paid a dividend of 6 cents a share last April whereas the increase will be 2 cents, bringing the payout to 8 cents per share - or an increase in the annual yield of 1.6%. All of this is the result of a leaner looking and more confident Cisco that took on a transformation that involved a drastic cost-cutting program that was designed to save the company $1 billion in annual expenses. While the program included the elimination of 10,000 jobs last year, it seems the company is now ready to start hiring again as evident by the company having added 400 employees alone in the latest quarter.


The company deserves a tremendous amount of credit for what it has been able to accomplish in a relatively short period of time. Since reaching its low point last year, in August at $13.30, the stock has climbed a remarkable 54% to just over $20 and there is plenty evidence to suggest that $30 is right around the corner. But this recent success has not come easy and nor am I yet ready to proclaim that the company is out of the woods just yet. There are still challenges that lie ahead, but I now have several reasons to expect a continued rise not only in the company's execution but also in its share price. Even on the most bearish assumptions, this stock should easily approach the $25 mark before the end of Q2 and $30 by the end of the year.

Disclosure: I am long CSCO.