Why Cisco's Still a Buy
Despite uninspiring fiscal fourth-quarter numbers, Cisco still warrants a place in growth portfolios.
Yes, the Silicon Valley networking equipment giant announced it is slashing headcount by 4,000 -- 5% of its workforce. Yes, orders from Asia and China were weak. And yes, CEO John Chambers said improvement in product lines from particular countries like Asia and China are "not at the pace we want." But yes, Cisco is still a buy .
In fact, Cisco looks like a better buy after word of the job cuts and the tempered outlook for the next quarter sent shares down some 9.5%. Why? The news and forward guidance wasn't really that bad. Sales in the company's original business of routing gear were flat, but revenue in Cisco's biggest segment, switching equipment, rose 5 %. Additionally, Cisco's data center group, which includes its new business in server systems, increased 43 %.
The San Jose, Calif.-headquartered company earned $0.42, or $2.27 billion, in the quarter ending July 27, up 17% from $0.36, or $1.92 billion, in the same period a year earlier, the Wall Street Journal reported . Revenue climbed to $12.42 billion from $11.69 billion . Also included in the results was a $172 million charge tied to a patent settlement with TiVo .
The biggest maker of networking equipment -- best known for hardware that helps data flow to, from, and around the Internet -- counts communications carriers, as well as a cache of other companies, among its customers. Cisco's routers, operating systems, and voice-over-Internet-protocol products are indeed the heart of the Internet and cloud-computing sector. As the company cuts costs and streamlines operations, it also continues to grow.
As Barron's recently reported, with the 2013 stock market bull run looking long in the tooth, yet by no means over, investors could benefit by picking stocks (like Cisco) where earnings growth looks reasonable to relative revenue gains . The sector where that is achievable, according to Barron's, is technology. Tech companies (like Cisco) are expected to increase earnings by 6.3% in the fourth quarter of 2013 on a 4.5% rise in revenue .
Reaching for the cloud
Cisco is increasingly investing in businesses that combine cloud-based services with LAN enterprise management. Over the next three years, the cloud market is expected to grow to over $177 billion, according to Gartner . Cisco's aim is to become the 800-pound gorilla in the IT industry by adding cloud services.
Without question, Amazon.com is the cloud leader, offering a plethora of options, from cloud storage for a few cents monthly to renting supercomputer-strength power for a whopping $5,000 an hour. In attempts to gain an even stronger foothold in the market, Amazon is adding new features to its cloud services and expanding its sales force. Although Amazon's Web Services is the dominant player in public clouds, it lacks the credibility for mission-critical enterprise solutions.
Here, VMware rules. Some 200 service providers offer clouds built on VMware's vCloud, including behemoths like Verizon. In March, VMware announced plans to launch vCloud Hybrid Services, its own public cloud platform. Moreover, using third-party project management, VMware's goal is to provide customers with consistent capacity management, performance management, and orchestration between clouds. As yet, Amazon hasn't looked into third-party management, but that's likely to change.
A changing Cisco
Cisco is continually changing and is always on the prowl for companies that will complement and enhance its businesses. With roughly $45 billion of cash on the books , more strategic deals are expected. Chambers told CNBC that his approach to acquisitions is "aggressive." He also defended the job cuts as "realigning resources to look where our growth opportunities would be." Chambers continued, saying the move was made "because the market is moving so fast."
Cisco is staying ahead of the competition by recognizing changes before they occur. "We literally are investing for the future," Chambers added. All of that is key for an innovative and futuristic tech company and why Cisco looks so appealing.
Cisco has a market cap of nearly $130 billion, trades at a modest P/E, of 13 and yields a very attractive 2.80%. In its heyday, during the dot-com boom, Cisco was a volatile high-flyer. Now, the company is a more like a blue-chip tech bellwether that is not so much about growth, but earnings.
Boring? Maybe a little, but something boring can be a beautiful thing for investors.
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The article Why Cisco's Still a Buy originally appeared on Fool.com.Diane Alter has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Cisco Systems, and VMware. The Motley Fool owns shares of Amazon.com and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
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