Major Upside in Cisco Stock?
If Cisco Systems, Inc. (NASDAQ:CSCO) stock wasn’t on your watch list before, it should be now. Why? The network equipment company could be on the verge of its next big rally.
Let me explain…
What do Piper Jaffray, Oppenheimer, Citigroup Inc, Deutsche Bank and Jefferies Group have in common? They all gave Cisco stock a “Buy” rating on Thursday. (Source: “Cisco Systems Company Profile,” Market Beat, last accessed May 19, 2016.)
Of course, analysts are not always right. But for all of these firms to rate a “Buy” on a stock, it takes something special.
Price targets are pretty optimistic, too. For instance, Deutsche Bank has a price target of $33.00 to $35.00 on Cisco stock. At midpoint, that would imply a 23.3% upside even after Thursday’s climb. (Source: Ibid.)
You might say that a mere 23% potential is not much in today’s tech sector, and look at how much some video-streaming stock gained last year. But that’s not really a fair comparison. You see, while Cisco is a tech company, it’s not a disruptive force anymore. The company has already established its presence. It has been around for more than three decades.
In fact, Cisco could almost be considered an income stock today. With a dividend yield of 3.92%, that’s impressive in the tech world. Moreover, since the company started paying quarterly dividends in 2011, it has increased its dividend payout seven times already. (Source: “Dividends and Splits,” Cisco Systems, Inc., last accessed May 19, 2016.)
If the stock can offer some capital gains alongside its handsome dividend yield, it would be even better. And a solid earnings report is certainly a good way to spark a rally.
In Cisco’s third quarter of fiscal 2016, it generated $12.0 billion in revenue, which represented a three percent increase year-over-year. The revenue number also beat Wall Street’s estimate of $11.97 billion. (Source: “Cisco Reports Third Quarter Earnings,” Cisco Systems, Inc., May 18, 2016.)
Earnings per share (EPS) turned out to be better than expected as well. In the quarter, Cisco’s adjusted EPS increased by six percent year-over-year to $0.57, which also topped analysts’ estimate of $0.55. (Source: Ibid.)
Note that under the current economic environment, growth in Cisco’s business is not going to be like it was in the nineties. At the same time, corporate IT spending hasn’t been very strong. In particular, many companies are outsourcing their computing work to cloud service providers such as Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT).
Combining a slow-growth macro environment with the trend of moving to cloud computing, the outlook doesn’t really spell optimistic for Cisco. And indeed those concerns have been a drag to Cisco stock, which had a negative return in the past 12 months.
However, according to the company, things might not be as bad as analysts were expecting.
For the current quarter, Cisco expects revenue to be in the range of $12.36 billion to $12.73 billion, which, for the most part, is better than analysts’ expectation of $12.4 billion. The company also projects earnings of between $0.59 and $0.61 per share, which again tops Wall Street’s estimate of $0.58. (Source: Ibid.)
Another reason why investors warmed up to Cisco stock is its profitability. Normally, when an industry is already established and facing headwinds, you’d expect margins to decline. But that’s not the case for Cisco. In its third fiscal quarter, Cisco’s product gross margin came in at 63.8%, representing a 220-basis-point expansion compared to the year-ago period. In the current quarter, the company expects its gross margin to be between 63% and 64%.
The Bottom Line on CSCO Stock
At the end of the day, valuations matter. While many tech stocks today trade at what can only be described as absurd valuations, Cisco stock is a pleasant surprise. Trading at $28.01, the company has a price-to-earnings (P/E) multiple of 13.87X. If you use its next fiscal year’s earnings, Cisco carries a forward P/E of just 11.51X.
If you are looking for value and dividends in the tech sector today, Cisco stock should be high on your watch list.