Cisco (CSCO) is a leading supplier of Internet Protocol infrastructure. In its fiscal 2012 which ended at the end of July, 2012, just less than half its $46.1 billion in sales was outside the United States, and most of its recent large sales have been on foreign soil. Its customers are typically governments, large businesses and universities.
2012 was an important milestone for Cisco, as it finally not only set the all time record in revenue for the company, its profits finally just about caught up with the company's 2008 record. Profits in fiscal 2012 came to $8.04 billion, or $1.49 per share. That compares favorably, or by 27%, with the $1.17 per share recorded in fiscal 2011.
Looking ahead, there are mixed messages. In the fiscal fourth quarter that ended in July 2012, Cisco's core router business rose by 4% from the year earlier. Cisco's key competitor in that segment, Juniper Networks (JNPR) saw an 18% drop in its router business in its comparable quarter. But competitors such as Microsoft (MSFT) and Polycom (PLCM) are making inroads into Cisco's video conferencing equipment business. Cisco has also done the right thing and disengaged with its Chinese partners, Huawei, which has been mentioned as a cybersecurity threat by the United States, and ZTE, which has been accused not only of being a security threat, but also of violating international trading bans with Iran.
If the economy both at home and overseas sees some improvement going forward, Cisco will surely benefit. Analysts see earnings increasing an average of 7.8% over the next five years. I think Cisco can do better than that, depending again on the health of the economies of the countries in which it does business. Cisco has also become one of the more shareholder friendly tech companies, paying a 3.0% yield, having retired almost 25% of its stock since 2000, and committing to return at least half its free cash flow to investors in the forms of dividends and or share buybacks.
Cisco is not the sort of growth company it was twenty years ago. It is a very stable company with a sublime balance sheet. It makes a suitable candidate for income oriented, conservative investors.
Another big business to business tech company is CA (CA), perhaps still better known by its former name, Computer Associates. CA is a software maker, specializing in applications for mainframes and large computer networks. In its first fiscal quarter of 2013, which ended June 30th, it reported GAAP earnings of $240 million, or $0.51 per share. This represented a 13% advance in the per share amount from the same quarter a year earlier. Currency fluctuations contributed about two cents per share to these profits. Revenue was down two percent, but again without the currency fluctuation, revenue would have been up one percent.
Despite the strong quarterly profit, there was some bad news. Bookings fell to $553 million in the quarter, about 36% below the year earlier quarter. To help compensate for the flat revenue short term and the lower bookings long term, CA is on a pretty aggressive cost cutting program. Expenses before interest and taxes declined about $60 million, or 7%, in the 2013 first quarter from the same quarter a year ago.
Management is predicting full year earnings for fiscal 2013 of from $2.07 to $2.12 per share. Fiscal 2012 earnings came to $1.93 per share. CA is working to move more away from its historically core, mainframe business into more consulting and cloud based services. There is little reason to doubt that this company will be successful in that transition, and it has cash on hand of over $2.5 billion to smooth out rough spots or for tuck in acquisitions. The market's unease with CA's mainframe business has helped depress the stock price down so that there is a PEG of just 1.1. I like CA as a long-term holding, in part due to its long term growth prospects, and in part because of its 4.0% current yield.
Finally, we have perhaps the most undervalued stock on the market today - Microsoft. I have explained before that the company has more than doubled both its revenue and its net profits since 2004, yet the stock has merely tread water. How low can its price to earnings ratio go? And why has the market punished it, other than finding the company boring due to its ubiquity? Microsoft's fiscal year ends June 30th. The year included Microsoft's first quarterly loss in its history as a public company in the fiscal fourth quarter, courtesy of an over $6 billion write off of a 2007 purchase of online advertiser Aquantive.
This current year will have the enormous benefit of new product launches, and the new Windows 8 operating software looks to be a winner. Steven Ballmer has wisely decided that if the market does not want to respect Microsoft as it is, why not make the company more like market darling Apple (AAPL). Microsoft sat on some $63 billion of cash at the close of its fiscal 2012. It has the flexibility to follow up its market leading Xbox and create consumer friendly products that seamlessly blend design, hardware and software as Apple has done in areas such as telephones and tablets.
I like Microsoft and its 3.1% yield a lot, and it is my top value pick in the technology sector.
What Microsoft partly, CA mostly, and Cisco exclusively are, are business-to-business (B2B) sellers. They sell most of their products on institutional levels to governments or peer companies. On a smaller scale, younger companies often need some help in finding appropriate B2B leads. A company such as Vendisys, for example, which systematically develops qualified business to business leads, thus freeing salespersons to sell, and not spend as much time finding, can help them do this.
Investors looking at the tech sector should consider Cisco as an income investment, CA as a long-term holding, and Microsoft as a top growth pick.