Cisco Is A Buy

Cisco Is A Buy


Cisco reported solid quarterly results as well as a solid guidance, but investors were disappointed nevertheless.

The company has a solid balance sheet, a solid dividend yield and is also using some of its cash to repurchase shares.

When assuming growth rates in line with management’s guidance and past growth rates, the stock seems deeply undervalued.

Justin Sullivan/Getty Images News About six months ago, I wrote my first and only article about Cisco Inc. ( CSCO ) and I called Cisco not only a solid investment, but also saw Cisco as one of the great lessons of investing history and a great example of what can happen when buying an asset at the completely wrong time. Since my last article, Cisco could climb as high as $60, but after disappointing quarterly results the stock dropped pretty steep. And although it could recover again in the following days, the stock could only increase 7.5% (including dividends) since my last article was published and Cisco clearly underperformed the S&P 500 ( SPY ).

In the following article, we are looking at Cisco again and try to answer the question if the reaction (double-digit price drop) to the last earnings call was justified or if the market created a buying opportunity for long-term investors. And we start by looking at these last quarterly results. Quarterly Results

Analysts and investors were clearly disappointed by Cisco’s first quarter results. And after several analysts had increased price targets for Cisco following the Investor Day in September 2021, the quarterly results and guidance were obviously a huge disappointment. But results were not as bad as one might expect. While Cisco missed revenue expectations by $90 million (not such a big deal considering $12.9 billion in revenue), Cisco could beat non-GAAP EPS by $0.02 and GAAP EPS by $0.03.

In the first quarter of fiscal 2022, Cisco generated $12,900 million in revenue, and compared to $11,929 million in the same quarter last year, this is an increase of 8.1%. Operating income increased from $2,570 million in Q1/21 to $3,438 million in Q1/22 – an increase of 33.8%. And finally, diluted earnings per share (on a GAAP basis) increased from $0.51 in Q1/21 to $0.70 in Q1/22, reflecting 37.3% year-over-year growth. Adjusted earnings per share increased from $0.76 in the same quarter last year to $0.82. (Source: Cisco Q1/22 Investor Presentation )

When looking at the two major segments, revenue from products increased from $8,587 million in the same quarter last year to $9,529 million this quarter (11.0% YoY growth) while service revenue increased only slightly (0.9% YoY growth) from $3,342 million to $3,371 million.

Cisco also issued a guidance for fiscal 2022 and is expecting earnings per share on a GAAP basis to be between $2.72 and $2.84. Compared to earnings per share of $2.50 in fiscal 2021, this is about 9% to 13.5% growth year-over-year. Adjusted, non-GAAP earnings per share are expected to be in a range between $3.38 and $3.45. (Source: Cisco Investor Day 2021 Presentation )

Full-year guidance is even higher than the one Cisco issued during its last Investor Day, but investors and analysts seemed to be disappointed, nevertheless. When looking for reasons for the sell-off, it might be the soft Q2 guidance as analysts were expecting 7.4% revenue growth for the next quarter and Cisco is guiding only 4.5% to 6.5% growth. Long-Term Growth

And while I pay attention to quarterly results as well as the guidance management is issuing, my investment decisions are usually not driven by these short-term developments. Instead, we are rather looking at the bigger picture and try to determine if Cisco is a good long-term investment.

After Cisco was one of the high growth companies in the 1990s and one of the high-flyers during the Dotcom bubble, Cisco is not really associated with high growth rates. And while it is certainly true that growth slowed down for Cisco in the last few years, the business is still able to grow. In the chart below, we can see the 10-year earnings per share CAGR declining over the past two decades, but aside from fiscal 2018, growth was still in the mid-to-high single digits (10-year average). And while earnings per share increased with a CAGR of 20.21% since 1991, EPS could still grow with a CAGR of 5.91% since 2010. (Source: Author’s work)

This would also be in line with management’s forward-looking targets for the next few years. According to the last Investor Day Presentation, management is expecting revenue as […]

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