Why Cisco Lifted the Dow Today


Yesterday, I suggested that Cisco Systems was poised for an earnings-powered jump. The stock had moved nowhere in three months, even as the Dow Jones Industrial Average kept rising. Cisco's rivals appeared to be losing market share to the networking giant, and the company is rebuilding itself around a more profitable business model.

"And that's why I think Cisco is one of the best Dow stocks you can buy today," I said. "This stock is about to enter another growth phase."

Fast-forward 24 hours, and it just feels good to be right.

Cisco's third quarter saw revenue right in line with the $12.2 billion analyst target, but adjusted earnings $0.51 per share exceeded analyst expectations by $0.02. Share prices soared as high as 14.2% overnight, reaching levels not seen since November 2010.

"We have the right products, the right solutions and our customers are coming to us to solve their biggest business problems," said Cisco CEO John Chambers. "The pace of change is increasing and Cisco is well positioned."

Indeed, Cisco is making strides in all the right high-margin markets. Sales were particularly strong in the data center segment, where Cisco now pairs its Unified Computing System servers with high-end network routers under the Nexus brand. Customers get an easy-to-manage computing package with high performance for in-house cloud services, Cisco scores a double sale, and it's all high-margin business.

All told, Cisco's operating margin jumped to 28%, far ahead of recent trends and a throwback to Cisco's heyday of market dominance in the early 2000s. These margins often serve as a good proxy for Cisco's share prices, so this is an encouraging sign for Cisco investors.

CSCO Operating Margin TTM Chart
CSCO Operating Margin TTM Chart

CSCO Operating Margin TTM data by YCharts. This chart does not account for the third quarter's 28% operating margin.

It's also a sign of Cisco's current pricing power. Juniper Networks scrapes along with a trailing operating margin of a mere 8%. Ciena and Alcatel-Lucent suffer under negative operating margins. None of these competitors has the massive economies of scale that Cisco boasts. Juniper can nearly match Cisco in terms of market history and proven performance. Ciena and Alcatel still know how to cook up a high-performance router for long-distance service providers, but there's no integrated package there. Alcatel is fighting for its corporate life with financing deals and a leaseback of its own headquarters. In short, these rivals can only hope to beat Cisco at its own game if they're willing to undercut its prices. Cisco is the only place to go for end-to-end networking -- now with an integrated server solution to boot.

Cisco's shares have delivered on that promise, beating all of these rivals over the last one- and five-year periods. And if Chambers' team keeps executing like this, I don't see any reason why this trend would reverse anytime soon.

So maybe you missed last night's Cisco jump, but it's not too late to invest in this stock yet. The long-term story is still developing.

Once a highflying tech darling, Cisco is now on the radar of value-oriented dividend-lovers. Get the lowdown on the routing juggernaut in The Motley Fool's premium report. Click here now to get started.

The article Why Cisco Lifted the Dow Today originally appeared on Fool.com.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Cisco Systems. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.