Acquisitions To Increase Shareholder Value For Cisco

| About: Cisco Systems, (CSCO)

In the second quarter of 2013 Cisco (NASDAQ:CSCO) completed five major acquisitions intended to add shareholder value through increased earnings growth. The quarter's completed acquisitions will help the company build on strong first half 2013 results.

In its second quarter earnings disclosure, the company reported revenue of $24.0 billion for the first half of 2013, up from $22.8 billion in the first half of 2012. Adjusted net income through the second quarter was up 8.2% from the first half of 2012 at $5.3 billion.

Revenue for the second quarter was up 5% from the comparable quarter last year at $12.1 billion. Adjusted net income was also up 6% from 2Q 2012 at $2.7 billion, resulting in earnings per share of $0.51 for the quarter. At $0.51, earnings per share beat analysts' consensus estimate by $0.03.

Product sales, which account for the majority of the firm's revenue, ended the first half of the year at $18.7 billion. Sales from Service ended the first half of the year at $5.2 billion, contributing 22% to the firm's revenue. Cisco's acquisition of Cloupia, Meraki, Cariden, BroadHop and Intucell in the second quarter is expected to help significantly grow future Product segment sales revenue for the company.

The acquisition of Cloupia was completed in December 2012. Cloupia, valued at $125 million, will add to Cisco's Data Center product portfolio which represented 4.5% of Product revenue for Cisco in 2Q 2013. With Cloupia, Cisco will have a wider variety of products to meet the demand from enterprise and service providers for infrastructure management software in the cloud. Cloupia's newly transitioned product offerings will positively impact revenue growth for Cisco's Data Center product segment in 2013 and beyond.

In December, Cisco also completed its acquisition of Meraki. Meraki will improve sales revenue growth in Cisco's Wireless product segment which generated 4.3% of Cisco's overall Product revenue in the second quarter of 2013. Meraki will target mid-market customers, helping them to achieve greater cloud networking capabilities. Valued at $1.2 billion, Meraki is expected to begin significantly contributing to Product revenue for Cisco in 4Q 2013.

On December 17, 2012, Cisco announced its acquisition of Cariden Technologies. Cisco's acquisition of Cariden enhances its design and traffic management offering for telecommunications service providers. The deal was valued at $141 million and will help Cisco remain an innovative leader in network optimization technology, further adding to the company's Product segment sales growth.

In the second quarter Cisco also completed its acquisition of BroadHop. BroadHop brings network policy management software to Cisco's portfolio of products, specifically targeting providers who seek to more efficiently manage service policy controls in the cloud. BroadHop's software offering will be integrated into Cisco's Service Provider Mobility Group increasing profitability for the firm's Product segment through synergies and increased sales revenue.

Finally, in the second quarter Cisco completed its acquisition of Intucell for approximately $475 million. Intucell adds self-optimizing network software to Cisco's Product portfolio. The newly acquired software products are expected to specifically target mobile carriers, also helping to increase total Product sales revenue growth for Cisco.

In summary, Cisco's second quarter acquisitions help it to obtain a greater supply advantage in key areas of market demand. The expanded array of product offerings add shareholder value through increased sales revenue growth, specifically in Cisco's Product segment, resulting in higher free cash flow valuation for the firm. Furthermore, free cash flow generation has been a strength for Cisco. The firm grew free cash flow 39% from the first quarter of 2013 while paying $743 million in dividends and approximately $2 billion in acquisitions.

In Cisco's second quarter earnings presentation, management provided guidance projecting industry leading revenue growth for the firm of four to six percent in the third quarter of 2013. Management's guidance indicates their confidence in revenue generation from the newly acquired products as well as continued sales growth from existing products.

Given steady state revenue growth for the firm, the stock is trading at a discount to its price target [1] of $21.44. Given high-end growth rates for the firm through the end of the fiscal year, the stock could reach a price target near $22.40, creating even greater upside potential for return to investors from the firm's second quarter acquisitions.

1 The price targets are derived from Bodie, Kane and Marcus' intrinsic value formula. The intrinsic value formula discounts the projected one-year future cash flow value by the risk-free rate on the one-year Treasury note plus a beta of 1.23 times the market's expected one-year risk premium. The market risk premium assumes stock market appreciation in 2013 to be similar to 2012 and is based on Dow Jones Industrial Average index return.

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.

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Tagged: , Networking & Communication Devices, Earnings
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