In August, I wrote about Cisco Systems (CSCO) needing to prove itself when it reported fourth quarter and full year earnings. Cisco had been one of the biggest tech laggards in recent years, and investors were getting frustrated with a slow growth strategy and buybacks that just weren't doing much. I stated that while most figured Europe would be weak, Cisco needed to show some promise. Well, Cisco's results were fairly decent, and guidance okay. But the biggest surprise was that the company announced a dividend hike of 75%.
Investors cheered the announcement and the stock rose 9.6% the next day, something I figured would happen if results were decent, and they were. But at the same time, I cautioned investors afterward, stating that investors needed to take a step back. The dividend hike was nice, but it might have been hiding other issues. To me, Cisco seemed like a short above $19 and a buy above $17. On Wednesday, Cisco closed exactly one penny below where it closed going into last quarter's results. That's where this quarter's report comes in. Cisco will report next Tuesday. Most likely, there won't be another huge dividend rise, so it's all coming down to the company's results. Despite good news last quarter, Cisco has to prove itself again.
In terms of guidance for this quarter, Cisco gave okay guidance, but it was certainly better than the guidance they gave in the previous quarter, which was a bit below expectations. For fiscal Q1, Cisco gave revenue guidance for 2% to 4% growth, the midpoint of which was a little below the 3.6% the street was looking for. Earnings per share guidance was a range of $0.45 to $0.47, in-line with estimates calling for $0.46.
Analysts are still expecting that $0.46 on the bottom line, compared against $0.43 in last year's Q1, but revenue expectations have certainly come up. Currently, analysts are looking for 4.8% growth in revenues over the prior year period, to $11.8 billion.
So are conditions soft? A few weeks ago, Juniper Networks (JNPR) beat on both the top and bottom lines, but reported guidance that was a bit below expectations. But, as some point out, Juniper reported soft routing product sales, which could point to Cisco taking away market share. Juniper shares initially rose during the after-hours session following the report, but sold off the next day, falling 9% and dragging down most other names in the space, including Cisco.
On the flip side, we saw Riverbed Technology (RVBD) both beat on the top and bottom line, as well as give guidance above expectations. Riverbed shares rose about 11.5% the next day, but have come down since, like Cisco and the rest of the market. Now, Riverbed reported about a week before Juniper, so maybe it is possible that Riverbed's good news pushed up Juniper's expectations. If that is true, it would explain why Juniper sold off, and why Juniper's guidance might have been light.
So where does that leave Cisco? Well, let's look at a couple of different angles. First, with the drop in the stock, the 56 cent a year dividend is now yielding 3.25%. That's 42 basis points more than a 30-Year Treasury bond currently. Also, just three weeks ago, Cisco was trading a little under $19, and the yield was just 2.97%. Anyone who has held back on purchasing the stock has not only seen the price come down about $1.60 or so, eliminating the day after earnings gains (where we closed at $18.88), but the yield has come up 28 basis points.
In terms of growth, Cisco is expected to see yearly revenues grow by 5.9% for the fiscal year ending in July 2013, and 5.7% for the following fiscal year. In terms of earnings per share, the forecast is for 5.4% and 7.2% for those two years, respectively. In terms of valuation, Cisco currently trades for 8.8 times earnings for the '13 fiscal year, and 8.2 times in the following fiscal year. As I recently described in an article about some top tier tech names, Cisco trades at the lowest P/E value when compared to names like Microsoft (MSFT) and Intel (INTC). Now, Microsoft has a little more expected growth than Cisco over the next two years, but Cisco seems to be in a much better situation than Intel.
The valuation seems fair at the moment, but one thing I always tell people is that the key phrase is "at the moment". Cisco is forecasted to do $1.95 in earnings per share this fiscal year, up from $1.85 in the previous year. Should the company's guidance be bad, and analyst expectations come down to say $1.90 for the year, you are eliminating half of the projected earnings per share growth. That has implications for valuation, and will most likely result in the stock dropping. When it comes to guidance for fiscal Q2 (which Cisco is anticipated to give guidance for next week), analysts are expecting 4.8% revenue growth and $0.48 in earnings. Cisco's earnings guidance in recent quarters has been mostly on the mark, but the revenue numbers have usually been a little light. But of course, if a company gives guidance that's lower than expected, it can help the company beat when the quarter is actually reported.
Even though Cisco reported decent results last time around and hiked the dividend substantially, the stock is right back to pre-earnings levels. This time around, there isn't expected to be any dividend news (other than maybe the simple quarterly declaration), so we will again focus on Cisco's results. Cisco will be need to prove itself again to get shares heading back towards $20, and not towards $15.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.