For a good portion of this year, Cisco Systems (NASDAQ:CSCO) was one of the best-performing names in the Dow Jones Industrial Average and impressive player among large- and meg-cap, mature technology companies.
Escalation of the U.S.-China trade spat vanquished the Cisco stock ebullience last month and the shares have only recent shown signs of snapping out of their doldrums. Though Cisco stock is up 3.12% for the week ending Sept. 12, the shares reside more than 14% below the 52-week high. Disappointing fiscal first-quarter guidance is one of the primary reasons why Cisco stock went from hero to dud in a matter of days.
“Cisco sees revenue for the quarter flat to up 2% compared with a year earlier, which implies a range of $3.1 billion to $3.36 billion, below the Street consensus at $3.4 billion,” according to Barron’s. “Cisco sees non-GAAP profit of 80 cents to 82 cents a share for the quarter, below consensus at 83 cents.”
Mr. Market was probably right to punish Cisco stock on the back of that poor profit preview. Think about the carnage in Cisco stock this way: investors embrace mature, older technology companies, like Cisco, for lack of earnings variability and volatility. If an investor wants growth and the risks that come with it, there are plenty of other places to be in tech.
So when a company like Cisco disappoints on earnings or guidance, the repudiation is likely to be severe, as it recently has been for Cisco stock.
There’s some good news as it pertains to Cisco stock, starting with the fact that it has some supporters on Wall Street and there may some underappreciated elements to the story here.
Recently, Piper Jaffray analyst James Fish did a sum-of-the-parts analysis on Cisco and arrived the company being worth $244 billion, or $57 a share. That compares with a close just under $50 with a market value of $211 billion on Thursday, Sept 12. The analyst isn’t saying Cisco can break up, but rather is pointing out growth opportunities in the name.
As I’ve noted a couple of times here, Cisco is “old school” by the technology sector’s standards, but that isn’t a detraction. The company is heavily involved with some high-growth technology segments, including cloud computing, cybersecurity and Internet of Things (IoT).
“As networking teams are adopting cloud solutions, Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends,” said Morningstar in a recent research piece. “With its extensive product portfolio, we see Cisco as the only one-stop-shop networking vendor. We believe Cisco’s vast existing installation base and budding product offerings, like network monitoring and analytics, keep Cisco as an industry leader.”
With Cisco stock, investors get some leverage to fast-growing market segments, but the growth comes at a fairly reasonable price (about 15x forward earnings) and with a 2.80% dividend yield.
There’s Not Much Growth Ahead for CSCO, But Steadiness Should Return
Cisco will likely grow revenue at 3% to 4% over the next three or four fiscal years. That’s nowhere growth stock territory, but if the company can offer modest surprises here and there with low earnings variability, conservative investors seeking technology exposure could be compelled to revisit Cisco stock.
Increased device connectivity via the booming IoT market is another potential driver for Cisco stock, though one that’s likely to be longer ranging in nature.
“The company’s wireless segment is well positioned to capitalize on the growing number of devices touching networks,” said Morningstar.
Additionally, Cisco is an epic capital return story. The company has pledged to return 50% of cash flow to investors via dividends and buybacks. A decade ago, its annual dividend was 12 cents a share. Today, it’s $1.40.
If the company could push gross margins into the 65% area and operating margins into the 30% realm, those could be significant catalysts for Cisco stock over the medium term.
Todd Shriber does not own any of the aforementioned securities.