Cisco Systems Continues To Create Value

Includes: CSCO, DELL, HPQ
by: The Value Investor

Shares of Cisco Systems (CSCO) fell 2% in after hours trading on Wednesday after the technology infrastructure giant reported its results for the second quarter of its fiscal 2013 after the market close.

Second Quarter Results

Cisco reported second quarter revenues of $12.10 billion, up 5% compared to the year before, beating analysts consensus of $12.06 billion. Net income on a GAAP-basis rose 44% to $3.14 billion, driven by a tax benefit of $926 million after the company reached a settlement with the Internal Revenue Service. Cisco benefited from the reinstatement of the federal R&D tax credit as well.

Non-GAAP earnings rose by 6.2% coming in at $2.7 billion. Earnings per share rose 9% to $0.51 per share. Non-GAAP earnings beat consensus estimates by three cents.

Cisco had a decent second quarter in the Americas and the Asian-Pacific region with reported revenue growth rates in the high single digits. Revenues in Europe, Middle-East and Africa fell by 5% amidst continued economic challenges and a strategic move to away from low-margin businesses.CEO and Chairman John Chambers commented on the results:

Cisco delivered record earnings per share this quarter and record revenue for the 8th quarter in a row in a challenging economic environment. We continue to drive the innovation, quality and leadership our customers expect, and we remain focused on consistent returns to our shareholders.


Cisco ended its second quarter with a whopping $46.4 billion in cash, equivalents and short term investments. The company operates with approximately $16.3 billion in short and long term debt, for a net cash position exceeding the $30 billion mark.

For the first six months of its fiscal 2013, Cisco generated revenues of $24.0 billion on which the company earned $5.2 billion. The company is on track to generate annual revenues of $48-$49 billion on which the firm could earn roughly $9 billion.

Factoring in a 2% drop in after hours trading, the market values Cisco at approximately $110 billion. This implies a valuation of roughly $80 billion for the firm's operating assets, which values the firm at 1.6 times annual revenues and 9 times annual earnings.

Cisco currently pays a quarterly dividend of $0.14 per share, for an annual dividend yield of 2.7%.

Some Historical Perspective

Year to date, shares of Cisco are up 5% as global markets continued to rally. Shares traded at these levels, currently at $21 as recent as the start of 2012, before shares fell back to $16 in the summer of the past year. Because of a 75% dividend hike, some strategic acquisitions and a decent first quarter later, shares have recovered by over a third, and currently exchange hands at $21 per share.

Despite the recovery, shares are still trading roughly a third below 2007s highs in the low thirties. Despite the dismal share price performance, Cisco grew its annual revenues by almost 30% between 2009 and 2012, with net income growing by a similar percentage. Shares fell as investors are unimpressed with recent growth rates and worry about the slowing operating performance.

Investment Thesis

Cisco continues to make strategic investments in order to boost the future growth profile of the firm. In recent months, the firm acquired Meraki, a leader in the cloud networking business, for approximately $1.2 billion. The company furthermore acquired Cloupia, a provider of automated converged data center infrastructure, Cariden Technologies and BroadHop. Over the past one and a half year, Cisco acquired 14 companies for a total consideration of $7 billion. Most of these names are focused on cloud software and other recurring revenue assets to further strengthen the business portfolio.

While making selective acquisitions, shareholders should not be worried about value-destroying acquisitions. Cash balances at Cisco are at record highs, despite the fact that the company pays an almost 3% dividend yield. Cisco furthermore repurchased approximately $500 million of its own shares during the second quarter, while continuing to buy promising companies and technologies.

At the time of the first quarter earnings release, I noted that an investment in Cisco remained attractive. Valuations remain extremely appealing, while the firm returns a lot of cash to shareholders by paying out dividends and repurchasing shares. At the same time, Cisco has enough room for business investments by making selective acquisitions.

Concerns remain about increased competition, a continued poor economy in Europe and possible expensive acquisitions. Many investors might even be worried that the company is awaiting Hewlett-Packard's (HPQ) or Dell's (DELL) fate of slowly becoming less competitive, being outpaced by competition and being too bureaucratic. Despite these concerns, the overall valuation appeal and strong balance sheet outweigh these risks.

Cisco is a perfect addition to any long-term diversified portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.