In the past four to five years, investors have been more
squarely focused on the consumer end of the tech landscape, bidding
up shares of
Apple (Nasdaq: AAPL)
Google (Nasdaq: GOOG)
Amazon.com (Nasdaq: AMZN)
and others. But on the business end of high-tech, the big
winners haven't been such industry leaders. Instead, most gains
have come from small, but growing software and data-storage
providers. But this theme may be upended in 2013, as one of the
most dominant companies in the enterprise space regains its
I'm talking about
Cisco Systems (Nasdaq: CSCO)
, which has had little to show investors during the past five
Blocking and tackling
Although the stock chart may give the impression of a company
slowly losing relevance, nothing could be further from the truth.
Cisco's operational performance has been quite solid in recent
years, especially when compared to stumbling giants such as
Dell (Nasdaq: DELL)
Computer Sciences (
, and especially when compared to more direct networking
competitors such as
Juniper Networks (Nasdaq: JNPR)
. Consider that Cisco has generated a whopping
in cumulative free cash flow during the past five
years. [This is exactly why StreetAuthority Co-Founder Paul Tracy
calls Cisco one of the "
World's Greatest Businesses
But Cisco can be taken to task for being a little too content to
simply squeeze out cash from a largely mature business.
Indeed, shares fell out of bed in the summer of 2011 simply because
investors could no longer see a long-term path to growth. A number
of the company's recent acquisitions had failed to deliver promised
growth, and Cisco's end markets -- most notably in government and
telecom -- weren't looking all that perky.
Yet in recent quarters, management has begun to talk about a
sharper game plan that will likely help solidify
Cisco's role in so many markets. The plan involves a number of
small steps that are unlikely to lead to explosive sales growth,
but should fuel a steady expansion in profit margins and
a more linear trend of profit growth.
Here are the five small steps that should add up to solid gains
for Cisco's shareholders in 2013.
Going where the action is
|offer clients this comprehensive suite of
offerings, a key consideration when information technology
managers worry about the interoperability of various
technology components in their corporate ecosystem.
"The market is moving to buying solutions rather
than buying standalone boxes, playing to Cisco's core
strength," noted analysts at Merrill Lynch.
A rising focus on software
|The company has set an ambitious target of doubling the
revenue it derives from software in the next five years.
This, in turn, should lead to a rising take rate for its
expanding suite of service offerings. This is a page right
out of the
playbook. Cisco's CEO John Chambers is
surely aware of IBM's 100% stock price gain during the past
five years, as investors have come to embrace Big Blue's
You can't blame Chambers for a bit of IBM envy. IBM
carries similar margins today, but its enterprise
value-to-sales (EV/Sales) ratio is 40% higher than Cisco's.
That's why emulating IBM is a wise move.
Furthering the IBM analogy, Chambers understands that
IBM's focus on long-term service contracts leads to much
smoother revenue and profit streams. The company aims to
boost service revenue from a current 21% of the sales mix to
more than 25% within three years.
Squeezing out costs and other margin boosters
|call Cisco a lean enterprise. In recent meetings
with analysts, however, Chambers has discussed plans to trim
down and/or reap synergies where possible in coming quarters.
This helps partially explain why he expects operating profits
to grow 3-4 percentage points faster than sales growth in the
next few years. (The rising mix of software is another
factor). Chambers also understands that profit gains need to
be linear if they are to be applauded byWall
Street (another lesson taught by Big Blue). The fact
that Cisco's operating profits fell by $2 billion in fiscal
(July) 2009, rose by a similar amount in 2010, fell again in
2011 and rose anew in 2012 is a clear impediment for
investors that crave linearity.
Tapping emerging markets
. Emerging markets currently represent about $9 billion in
annual sales (20% of the entire sales base), though Cisco
aims to boost that figure by 10% annually in the next three
to five years. To get there, Cisco is developing lower-cost
solutions for these price-sensitive markets.
Free Cash Flow = Buybacks
|cash flow on buybacks and dividends, this trend
Risks to Consider:
To augment growth, Cisco has signaled plans to pursue a fairly
hefty acquisition in coming quarters, and such deals can
sometimes spook investors.
Action to Take -->
Even with all of these growth-inducing steps, Cisco is only
likely to boost sales in the mid-to-upper single digits each year,
while per-share profit growth is unlikely to exceed 10%. But by
delivering these kinds of gains in a steady linear fashion,
investors are likely to reward this stock with an
ever-higher multiple . When you include Cisco's massive $33
billion net cash pile, this becomes a low-multiple stock with a
fairly low level of embedded expectations. This means 2013 should
represent a fresh perspective for this one-time highflyer as growth