Cisco: Why a Weak Performance Is an Opportunity

Even though Cisco Systems (CSCO) beat estimates in the recently-reported quarter, the company's shares have continued declining. Cisco had posted fourth-quarter revenue of $12.8 billion, exceeding the consensus estimate handsomely and representing growth of 3.6% from last year. This was better than the company's own expectations.

However, the impressive performance by Cisco in the previous quarter didn't bring any relief to investors. But, this could be a buying opportunity for the long run. Let's see why.

Making smart moves

Cisco is increasingly selling certain non-strategic parts of its portfolio to fund key growth opportunities.

In addition, Cisco is improving software and service offerings to accelerate growth and overall profitability. The technology major was able to improve both its top and bottom lines last quarter as it offered sustainable differentiation by implementing consolidated architectures designed on intelligent networks.

Moreover, Cisco's capability of delivering integrated solutions and architectures with robust security, scale, and speed has allowed it to deliver sustainable differentiation with time, as observed from its robust gross margin, profitability, and improved cash generation. In fact, Cisco has shifted strategically from selling mobility, cloud, boxes or any other key solution to partners by centering on the key customer requirements.

Looking ahead, Cisco seems well-positioned to dominate a majority of its competitors since rivals selling discounted technology building blocks are unable to compete with Cisco's overall cost benefit, speed, security, and operational efficiency.

Recording impressive growth

The strategy of Cisco to shift its sales focus from selling boxes to selling integrated solutions is being accepted by customers even in a difficult global operating environment. Cisco has identified several key strength areas, including international enterprise that saw 7% order growth recently, an increase of 6% in worldwide commercial orders, and 7% growth in international public sector orders.

Overall, the company's performance in the U.S., excluding service providers, was significant with 21% U.S. enterprise order growth. Meanwhile, U.S. commercial orders were up 11% and U.S. public sector orders expanded 10% earlier this year. As a result of this strong order growth, Cisco should be able to sustain its revenue growth going forward.

More positives to consider

Cisco's recent momentum indicates that the company will be able to return cash to shareholders going forward through dividends and repurchases. In fact, during the third quarter, Cisco had returned $2.1 billion to shareholders, an increase of 11% from the preceding quarter.

Additionally, the consensus estimate among 44 analysts who are evaluating Cisco indicates that the company will outperform the market in the long run. This is not surprising as Cisco is increasingly improving the scope of its business by diversifying into new solutions.

Conclusion

Cisco's valuation indicates that the company will be able to improve its bottom line performance further going forward. It has a trailing P/E ratio of 14.7 and a forward P/E ratio of 10.5. Thus, as compared to the industry average P/E ratio of 19.5, the stock is cheap. This makes Cisco a good buy, especially considering that it has a strong balance sheet with $60 billion in cash and $25 billion in debt. This means that Cisco has got enough resources at hand to invest in its growth going forward, making the stock a good buy on the drop.

Published on Sep 4, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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