Cisco Systems' Earnings: Good Report, but Fierce Competition Persists

Cisco Systems has had a rough couple of quarters, but the company bounced back strongly after its recent quarter and its stock jumped over 6%. Over the last year, Cisco's stock has been relatively flat while the S&P 500 has returned close to 13%. The past three months have been a different story for Cisco, however, as its stock has rallied over 8% while the S&P 500 has yielded a little over 2%. Still, Cisco remains in stiff competition with its competitors Alcatel-Lucent and Juniper Networks .

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Cisco's recent quarter
Cisco's stock rose considerably when the company released its recent financial results, as evidenced toward the end of the second chart. Cisco's revenue, net income, and earnings per share all decreased in the third quarter of 2014 compared to the third quarter in 2013, but those same metrics beat Wall Street's estimates. Third-quarter revenue decreased by 5.5% to $11.5 billion from $12.2 billion in the year ago quarter, and the resulting earnings also decreased, by 12%, to $2.2 billion from $2.5 billion .

Due to stock repurchases, Cisco's earnings per share fell less than its income, by 8.7%, to $0.42 versus $0.46 in 2013's third quarter. Nonetheless, the adjusted, non-GAAP EPS, which Wall Street follows, was $0.51 in the 2014 third quarter. This beat the consensus analyst estimate of $0.48. Further, the revenue number of $11.5 billion for the quarter also beat the consensus analyst estimate of $11.36 billion.

Cisco repurchased about 90 million shares in the recent quarter at a value of $2 billion. This helped its EPS number in the quarter, and the company still has around $10.1 billion remaining in its stock repurchase program. As the company bounces back, its EPS still has room to improve even if its net income and revenue continue to decline. Furthermore, Cisco pays a dividend as part of its capital return program to shareholders. The company paid a $0.19 dividend in the quarter, and its annual dividend yield is currently 3.1%. This makes it an attractive income stock that yields more than the 10-year Treasury bond.

Cisco's competition
Alcatel-Lucent is undergoing a restructuring of its operations and reported decreased revenue with improvements in net income and earnings per share in its latest quarter. Still, the net income and EPS numbers were negative at -101 million and -0.04, respectively; both numbers are in euros. Alcatel-Lucent's revenue fell by a small amount (0.5%) to 3,104 euros, down from 3,226 euros in its first quarter of 2014. Furthermore, Alcatel-Lucent has been unprofitable in the last twelve months and in its last two fiscal years, 2012 and 2013 .

Juniper Networks has found better success than Alcatel-Lucent and has been profitable on not only a trailing-twelve-month basis but over its last two fiscal years as well. In its recent quarter, the company increased its revenue by 10% to $1.17 billion. Its income ballooned to $110.6 million, representing an increase of 21.5%, and its resultant EPS jumped by 22% to $0.22 from $0.18. However, Juniper's results benefited from a one-time gain and charge with a net positive impact. The company recorded a $0.33 per share gain in the quarter from selling some of its equity investments and a $0.25 per share charge related to its restructuring. The net effect was an addition of $0.08 per share to its normal operating earnings, skewing the results otherwise.

Cisco a better investment
Like Juniper, but unlike Alcatel-Lucent, Cisco has been profitable in the last twelve months and its last two fiscal years. In addition, Cisco trades at a discount to the S&P 500 on a P/E basis with a P/E of 16 compared to the S&P 500's 18. On top of that, Cisco trades at a discount to its competitor, Juniper Networks, which currently has a P/E ratio of 27; this is almost twice that of Cisco's. All in all, Cisco looks attractive on a P/E valuation basis, is working hard to build its business, and is returning money to shareholders at a generous margin.

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