Cisco Systems, Inc.: Why CSCO Stock Could Climb 27%

CSCO StockMore Connected Devices, Brighter Future for CSCO Stock

Cisco Systems, Inc. (NASDAQ:CSCO) stock has been delivering better-than-expected financial results over the past four quarters. The company’s shareholders are pleased, since CSCO stock went up from $22.46 to its current trading price of around $31.56 per share, gaining nearly 22% over the past year.

Does Cisco stock have the ability to maintain its robust financial performance and have CSCO stock continue to deliver handsome returns to shareholders?  I believe Cisco stock investors should be confident and optimistic that the company will remain profitable in the years ahead.

Cisco Stock’s Latest Financial Results and Outlook

In August, Cisco stock reported that its adjusted earnings were up nine percent to $0.63 per share and revenue rose two percent (excluding its “SP Video CPE” business) to $12.6 billion for the fourth-quarter fiscal 2016. Its quarterly results topped $0.60 in earnings per share and the $12.57 billion in revenue estimated by Wall Street analysts.

For the first quarter of fiscal 2017, Cisco stock expected to generate non-generally accepted accounting principles (GAAP) earnings of around $0.58 to $0.60 per share and have its revenue increase one percent year-over-year.

Cisco is executing a restructuring plan to optimize its cost base in lower-growth areas of its portfolio. The company is reducing its global workforce by seven percent, or cutting 5,500 jobs, in the first quarter of 2017. It is investing more in its priority areas, including security, Internet of Things (IoT), collaboration, the cloud, and next-generation data centers. (Source: “Cisco Reports Fourth Quarter and Fiscal Year 2016 Earnings,” Cisco Systems, Inc., August 17, 2016.)

The company’s CEO Chuck Robbins said its restructuring plan is to target aggressive investments in priority areas, and accelerate innovation across its portfolio to drive long-term growth, regardless of the macro environment, which he believes still uncertain.

Cisco Stock is Well Positioned to Drive Growth

Robbins is positive that Cisco is well positioned to benefit from any tailwind in the market. He noted that customers’ priority is security. The company has advantage and capability to deliver security at scale with cutting-edge innovation because it is the global leader in networking. According to him, Cisco is leading the transition to cloud-delivered security.

Cisco acquired CloudLock to extend its cloud-based security platform. The company is rapidly deploying its advanced threat solutions to more than 17,000 customers worldwide. It is now focused on winning in the next-generation firewall market. The company added more than 6,000 customers over the previous quarter. Its security business recorded a deferred revenue growth rate of 29%.

The company continues to invest in next-generation data centers, and customers go to Cisco for an open programmable and automated infrastructure to deploy applications quickly and provide network services swiftly. Cisco deployed its “Tetration Analytics” platform to offer complete visibility across the data center.

The company can automate and organize data center application workloads in real time between hybrid and private clouds while allowing policy management Application Centric Infrastructure (ACI) by combining Tetration and the “Cisco CloudCenter.” The company noted that its ACI’s revenue growth rate was 36% in the fourth quarter.

Robbins also reported that CSCO stock is consistently driving growth through collaboration with deferred revenue growth rate of 13% in the Q4.

Last month, Cisco entered a strategic partnership with Inc. (NYSE:CRM) to develop and market solutions that combine the networking company’s collaboration, IoT, and contact center platforms with the CRM company’s “Sales Cloud,” “IOT Cloud,” and “Service Cloud.” (Source:  “Cisco and Salesforce Announce Global Strategic Alliance, NASDAQ, September 22, 2016.)

Cisco is making progress in its transition to software and subscription-based models in the area of collaboration and security. Its overall product deferred revenue related to software and subscription businesses increased 33% in Q4.

Cisco Business to Become More Predictable

During an interview with CNBC’s Jim Cramer last week, Robbins said Cisco is focused on transitioning the company’s business to be faster and more predictable, thus making its business model much better.

Robbins emphasized that Cisco’s core network would play a much important role in defending the security of enterprises as IoT takes off. He stressed that security threats are expanding every day, and Cisco is in the best position to lead the market. According to him, its key differentiator within two years is integrating security deeply into routers and switches.

Robbins is confident that Cisco can grow faster by driving security deeply into the network. He also believes that the occurring digital transformation and IoT promises a bright future for the company because more connected devices require more securitie solutions. He estimated that 50 billion devices would be connected in the next four years. (Source: Interview, “Cisco Systems CEO Chuck Robbins: Transforming Growth | Mad Money,” CNBC, September 30, 2016.)

The Bottom Line for CSCO Stock

Cisco is a shareholder-friendly company, as it is committed to returning a minimum of 50% of its free cash flow to investors every year through dividends and share buybacks.  It has returned $8.7 billion to shareholders, representing 70% of its total free cash flow in its fiscal 2016.

The company is projected to achieve a free cash flow of around $7.0 billion next year. It is also expected to raise its annual dividend from $0.94 per share to $1.07 per share.

Cisco’s ability to deliver solid earnings and revenue consistently, despite a volatile market environment, shows that it is a great company. Investing in CSCO stock should be rewarding.

In fact, Wall Street analysts believe that the company would outperform the market. They have forecasted that CSCO stock could reach as much as $40.00 per share, an upside of more than 27% over the next 12 months.