Cisco Justifies Shareholder Confidence In Its Stock

| About: Cisco Systems, (CSCO)
This article is now exclusive for PRO subscribers.

Cisco Systems (NASDAQ: CSCO) has continued to justify the confidence of its shareholders, with share prices increasing by some 34% over the past year. According to the results of its latest earnings report, its revenues during the fourth quarter of FY 2013 increased by 6.2% to $12.4 billion during the May to July period, compared with the same quarter last year, which was in line with Wall Street analysts' expectations. In addition, other financial indicators also recorded increases, with its earnings per share growing by some 16.7% year-on-year to $0.52 while its net income rose by 18% to $2.8 billion.

Its guidance for 2014 was also positive, with a consensus estimate of $2.24 EPS, implying a forward P/E of 10, while earnings growth for the next five years is 9%. In addition, the company also declared cash dividends of $0.17 per share for the quarter, paying a total of $918 million to shareholders, as well as buying back some 47 million shares of stock at around $24.80 per share, or a total of $1.2 billion worth of shares. The company designs and sells IP-based networking and products related to the IT and communications sectors worldwide.

More Favorable Conditions

The stronger results were attributed to a more favorable macroeconomic condition that allowed Cisco to increase its market share in the data center sector through stronger sales of its routers, switches and servers. There was expected to be increased demand from corporations for Cisco products as these enterprises upgraded their systems and shifted to cloud computing. According to research firm IDC, the networking and communications company has a bright future with the data center market seen to grow by more than 400% from $3.2 billion in 2010 to $16.9 billion by 2015. In addition, Infonetics Research predicted that the carrier router and switch market will grow by 8% annually until 2017.

Cisco recently announced that it would be cutting 5% of its workforce, or some 4,000 jobs, as part of a growth strategy that would free up resources for strategic acquisitions as well as to support the company's faster-growing segments. CEO John Chambers said the company sees growth opportunities in cloud computing, Internet products and mobile services.

Cisco also performed well when compared to its competitors in the networking and communication devices sector. The network equipment giant had a profit margin of 20.1% and operating margin of 22.3%, which is better than rivals Hewlett-Packard (NYSE:HPQ) and Juniper Networks (NYSE:JNPR). Hewlett-Packard has a profit margin of 11.6% and an operating margin of 7.9%, while Juniper's profit margin is 6.7% and operating margin, 11.6%.

Cisco has a lower beta than the two companies, at 1.4 compared with Hewlett-Packard's 1.67 and Juniper's 2.26, which means share prices will experience less volatility. And at 7.1%, Cisco's return on assets are more favorable than Hewlett-Packard's 4.9% and Juniper's 3.2%, as well as enjoying a better return on equity (17.8%) while Juniper's was 16.9% and Hewlett-Packard - 40.8%.

The company is also performing strongly relative to general industry indicators. Cisco has a debt-to-equity ratio of 0.29 which, although it is very low, is still greater than the industry average, and also maintains a 2.67 quick ratio, which shows that it has the ability to cover its short-term cash requirements quickly.

A Recommended Buy

The improved prospects of the company were recognized by analysts who recommended that their clients buy the stock. ISI Group upgraded its estimates for the stock to a price target of $22 a share, while JP Morgan also boosted its price targets to $26 per share from the previous estimate of $18. The stock has been trading at a 52-week range of $16.68 to $26.49 and recently closed at $23.86. A significant number of hedge fund managers also continue to hold Cisco stock as part of the mutual funds they are overseeing. As of end-March 2013, some 74 fund managers owned Cisco stock with 20 of them allocating at least one percent of their portfolio to it. In addition, insiders also continued to maintain their substantial shareholdings in the company, an indicator that they believe the stock still represents good value.

In Closing

The general consensus for Cisco stock is that despite a few minor weaknesses, the company's strengths, such as its generally solid financial position, attractive valuation and sturdy stock prices will ensure that shares will continue to accumulate in value in the future.

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.