Pricing power, data center strength, and higher spending from
enterprise customers and government agencies helped
Cisco Systems Inc.
deliver strong financial results for fiscal fourth quarter 2013.
Earnings per share of $.51 surpassed the firm's high-end guidance
and analyst expectations of $.48. 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
workforce 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
cause for concern. However, since Cisco generates 80% of its
revenues from the US and Europe -- which are performing strongly --
the lackluster near-term performance due to 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 its aggressive
pricing strategy over the years have helped it gain market share
Juniper Networks Inc.
). While Cisco has the lion's share of the market in switches (65%)
and routing (70%), management has not shied away from entering new
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
Our firm's proprietary fundamental metrics give Cisco an Outperform
rating. We place Cisco in the right quadrant of the quality/value
chart, indicating high quality and investment value (see chart
The above quality/value chart consists of the following
companies: Cisco Systems Inc.; Juniper Networks Inc.;
Motorola Mobility Holdings Inc.
JDS Uniphase Corporation
(CIEN); and Alcatel-Lucent ADS.
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 fourth quarter 2013
vs.16.1% in fiscal fourth quarter 2012. Additionally, CSCO offers
a higher ROE when compared to the peer average of 11.64%.An
integrated solution to help you understand your investment's
strengths and weaknesses quickly and effectively, the Market IQ
Terminal offers investment analysis and portfolio optimization
based on proprietary fundamentals, market sentiment, analyst
sentiment, and technical parameters.
- 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, its 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 our firm'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.
We have 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 our sentiment, moving from
$19.11 to $24.35, which was a 20% move in nine 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 noncore 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 expanding 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 three years,
management has ensured that the balance sheet is flushed with cash,
which paves way for more investments, R&D expenditure,
dividends, and share buybacks, and provides a buffer against
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 article was written for Minyanville by Adil Yousuf of