Just a few months ago, declining sales, earnings and margins caused many analysts and investors to lose faith in networking giant Cisco (NASDAQ:CSCO). Wednesday’s stronger fiscal first-quarter earnings should win back some of that confidence.
Cisco sales rose by nearly 5% in the first quarter to $11.3 billion — with most of that gain coming in the month of October. Not counting restructuring-related costs, the company’s earnings totaled $2.3 billion (43 cents per share), down from $2.4 billion (42 cents) for same quarter last year. Despite the year-over-year slip in profit, CSCO still beat Wall Street earnings estimates of 39 cents per share on $11 billion in revenue.
The company’s second-quarter outlook also was higher than expected, with CSCO forecasting earnings per share of 42 to 44 cents — analysts had estimated an EPS of 42 cents. Cisco’s revenue estimate of $11.1 billion to $11.3 billion is in the same range as most analysts predicted.
Those solid earnings suggest the much-needed course correction the company made earlier this year is starting to yield results. When Cisco announced its second-quarter earnings slip nine months ago, many investors complained that the networking innovator had lost a step and now was struggling to keep pace with the next generation of Internet growth. The company apparently got the message and dove at once into an extreme makeover.
Here are four reasons investors should believe in Cisco’s comeback:
Five Foundational Principles
CEO John Chambers, who started the effort to refocus the company and save $1 billion, is committed to five foundational principles he feels are essential to the company’s success:
- Growing its core switching, routing and services business.
- Addressing collaboration, where quarterly revenue grew 12%.
- Continuing to grow the high-potential data center market.
- Helping telecom and other service providers better meet video demand.
- Focusing on architectures for business transformation.
Unified Computing Focus
One of Cisco’s biggest market opportunities is its new converged data center platform, dubbed Unified Computing System. UCS is designed to make it easier and quicker for customers to bring up new services and applications in physical server, virtualized data center or cloud computing environments. Orders for the system grew by a whopping 122% in the first quarter; revenue was up 116%.
Leaner and Meaner
As part of its extreme makeover, Cisco jettisoned 12,900 employees and shuttered 10 businesses — including its $590-million Flip consumer video camera line, which had turned out to be a flop. It also sold off a manufacturing plant in Mexico and boosted investment in other mission-critical areas. Those changes cost the company $772 million in the fourth quarter.
Solid Fundamentals
With a market cap of $94.8 billion, CSCO has a price/earnings-to-growth ratio of 1, meaning that the stock is fairly valued. With total debt of $39.8 billion and total assets of $87 billion, Cisco pays a current dividend yield of about 1%. The company’s exposure to Europe — as well as its debt-to-equity ratio of 35 — raise an eyebrow, so continue to keep one eye on CSCO’s financials and the other on how the euro zone fiasco plays out. The stock dropped with the rest of the market on Wednesday by nearly 4%. But at $17.61, the stock still is trading more than 32% above its 52-week low of $13.30 in August.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.
