Cisco Shares Will Pop on Thursday; They're Still a Good Long-Term Bet
U.S. stocks fell on Wednesday, with the benchmark S&P 500 down 0.5% and the narrower Dow Jones Industrial Average down 0.6%. The technology-heavy Nasdaq Composite Index lost 0.7%, but it's the small-capitalization segment that is giving the punditocracy fits, as the Russell 2000 Index dropped 1.6%, for a total decline of 9.1% relative to its 52-week high.
I don't think small-caps' underperformance is anything mysterious or unsettling: Small-capitalization stocks got ahead of themselves in terms of valuation; what we're now witnessing is nothing other than a healthy correction.
In company-specific news, Cisco Systems will help lift the Dow and the Nasdaq tomorrow, as the company signaled a return to growth in its latest quarterly report. Cisco's results and outlook were well received by investors in the after-hours session; shares were up 7.2% at 7:59 p.m. EDT.
On the headline numbers: Cisco beat Wall Street's expectations with regard to both revenues and earnings per share in its fiscal third quarter ending April 26, as the following table highlights:
Actual/Year-on-Year Growth (Decline)
Earnings per share*
Free cash flow
Roughly 20% of the $0.03 "beat" on earnings per share (the difference between the $0.51 achieved and the $0.48 consensus estimate) is attributable to Cisco's repurchase of roughly 90 million shares during the quarter, but I have no problem with this, as the $22.24 average price per share Cisco paid represents a discount to intrinsic value.
On the face of it, the 5.5% year-on-year decline in revenues looks like a concern, but Cisco CEO John Chambers sees a return to growth on the horizon. During the earnings conference call, he said he believes Cisco will get back to mid-single-digit revenue growth before downplaying expectations, telling analysts: "[W]e want you all to not get ahead of us on this. We have some real heavy lifting to do."
Chambers is right to add some caveats: Analysts are a tough group to herd, for they are obsessed with nice, neat, linear growth rates (for mature companies, that is). Unfortunately, the real world does not always conform to that model; two quarters ago, Cisco startled sell-side analysts with its fiscal second quarter and full-year guidance. However, three quarters into its fiscal year, the $1.95 to $2.05 range for earnings per share Cisco gave at the time looks spot-on. (For reference, three quarters into its fiscal year, Cisco has cumulative earnings-per-share of $1.51, with a consensus estimate for the fourth quarter of $0.51.)
On the release of Cisco's prior quarterly earnings, I suggested that the market's disappointment created opportunity, writing that "this evening's drop, should it persist into tomorrow's session (and I expect it will), gives long-term, fundamentally oriented investors the opportunity to buy shares that offer even better value." It's too early to make any definitive assessments of that call, but since the publication of my article, Cisco's stock has roughly matched the performance of the S&P 500 and beaten the Nasdaq, which is underwater over the period.
Today's after-hours bump looks like a correction of last quarter's (negative) overreaction. At a forward price-to-earnings ratio of just 10.7, owning Cisco shares is a bet that continues to make sense -- even after the "pop" they will likely experience tomorrow.
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The article Cisco Shares Will Pop on Thursday; They're Still a Good Long-Term Bet originally appeared on Fool.com.Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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