Pricing power, data center strength, and higher spending from enterprise customers and government agencies helped Cisco Systems Inc. (CSCO) deliver strong financial results for fiscal Q4 2013.
EPS of 51 cents per share surpassed the firms' high-end guidance and analyst expectations of 48 cents per share. Revenues for the quarter also increased 6.2% (year over year), driven by growth in the Americas and EMEA regions of 7% and 12% respectively.
Yet, shares have declined approximately 10% from recent highs due to the firm's weak guidance and decision to lay-off almost 5% of its work force in anticipation of a challenging economic environment.
Though Cisco reiterated its annual revenue and margin projections, it lowered revenue growth guidance (2%-5% vs. long term 5%-7% growth) for the upcoming quarter, citing troublesome economic climate particularly in emerging markets like China.
China is expected to be a future driver of growth for the networking behemoth, hence, weak prospects in the Chinese market is a cause of concern. However, since Cisco generates 80% of its revenues from US and Europe — which are performing strongly — the near term lackluster performance from emerging market slowdown is not an extreme concern.
Additionally, Cisco's downsizing, which has seen a rather harsh reaction from the Street, should be viewed as a good strategic decision by the firm to reallocate resources for more lucrative product endeavors, and an attempt to ensure that expenses remain in line with revenues if economic environment worsens.
The Company's dominant market position as well as aggressive pricing strategy over the years have helped it gain market share from rivals Juniper Networks Inc. (NASDAQ:JNPR) and Alcatel-Lucent (NYSE:ALU). While Cisco has a lion's share of the market in switches (65%) and routing (70%), management has not shied away to enter new market segments.
Cisco has pursued an aggressive growth strategy over the last few years, making most of its acquisitions in high-growth segments such as cloud and mobile, which have become a holy grail for almost all tech companies. Some of the recent hallmark acquisitions include Intucell (mobile network management), Ubiquisys (intelligent 3G and LTE small cell technologies), Meraki (cloud-based WiFi systems), SolveDirect (cloud services)and Whiptail (memory systems solutions provider).
Market IQ's proprietary Fundamental metrics give Cisco an Outperform rating. Market IQ places Cisco in the right quadrant of the Quality/Value chart indicating high Quality and investment Value (see below).
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The above Quality - Value chart consists of the following companies: Cisco Systems Inc. (NASDAQ:CSCO), Juniper Networks Inc. (NASDAQ:JNPR), Motorola Solutions (NYSE:MSI), Motorola Mobility Holdings Inc. (NYSE:MMI), JDS Uniphase Corporation (NASDAQ:JDSU), Qualcomm Incorporated (NASDAQ:QCOM), Ciena Corporation (NASDAQ:CIEN) and Alcatel-Lucent ADS (NYSE:ALU).
The Company's Qualitative strengths can be seen in several areas such as Return on Equity (ROE) and Financial Strength.
- ROE increased to 17.25% in fiscal Q4 2013 vs. 16.1% in fiscal Q4 2012. Additionally, CSCO offers a higher ROE when compared to the peer average of 11.64%.
- Cisco has an Equity to Debt ratio of 1.67, which is higher than the industry average of 1.64, indicating strong Financial standing relative to its peer group. Additionally, Interest Coverage ratio of 19.61 is significantly higher than the industry average of 7.88, which, indicates the firm's strong ability to meet is short-term debt obligations.
Based on Market IQ's Valuation metrics, Cisco is trading at a discount relative to its peers. Additionally, with a current dividend yield of 2.9%, Valuation looks attractive.
Note: The table shows capped priced multiples
Market IQ has maintained a consistently bullish sentiment on Cisco since January 2012, based on chatter pertaining to the Company on various social media channels. Looking past the normal volatility in the Sentiment chart below, we only see bullish spikes in sentiment — no predominant negative sentiment dips. Interestingly, Cisco's stock price has correlated strongly with Market IQ's sentiment, moving from $19.11 to $23.35 — a 22% move in 9 months (see below for Social Sentiment chart).
Post financial crises, the Company's prospects appeared grim. However, Cisco has since gone on to divest its non-core businesses and evolved from a communications partner to a more strategic Technology partner. Operationally, the Company has done extremely well, as Management has focused on generating strong operating cash flows from its core business and expanded to new areas. The Company has also successfully kept investor optimism in check, providing conservative guidance on most occasions.
Additionally, despite a spending spree over the last 3 years, management has ensured that the balance sheet is flushed with cash, which paves way for more investments, R&D expenditure, dividends, share buy backs, and provides a buffer against uncertainty.
Overall, Cisco is executing well on its plans and looks well positioned going forward. The Company's dominant market position as well as aggressive job cuts are likely to help maintain market share from main rivals Juniper and Alcatel-Lucent in an uncertain economic environment, and could help it even further when the concerns subside.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.