Is Cisco Systems a Buy After Mixed Earnings Results? Networking giant Cisco (CSCO) reported mixed fourth-quarter earnings results but provided impressive guidance for fiscal 2023, supported by strong demand for cloud computing infrastructure and telecom networks combined with easing...

Networking giant Cisco (CSCO) reported mixed fourth-quarter earnings results but provided impressive guidance for fiscal 2023, supported by strong demand for cloud computing infrastructure and telecom networks combined with easing supply-chain pressures and chip shortages. However, is it wise to invest in the stock now? Read on to know our view….

San Jose, California-based Cisco Systems, Inc. (CSCO) manufactures and sells Internet Protocol-based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China. The company serves businesses of various sizes, governments, public institutions, and services providers.

CSCO reported mixed fourth-quarter financial results. The company's revenue came in at $13.10 billion, with product and service revenue flat year-over-year. Total revenue exceeded the company's expectations due to solid execution and various initiatives to reduce the supply chain pressures.

"Full-year product orders and backlog are both at record highs and reflect the strong demand we continue to see for our innovation and the overall value we bring to our customers as they accelerate their digital transformation," said Chuck Robbins, Chairman, and CEO of CSCO.

However, its non-GAAP operating income declined 4% year-over-year to $4.20 billion. In addition, its non-GAAP net income and EPS amounted to $3.40 billion and $0.83, registering a decline of 3% and 1% year-over-year, respectively.

For the fiscal 2023 first quarter, CSCO expects revenue growth between 2% and 4% and non-GAAP EPS between $0.82 and $0.84. For the fiscal year 2023, the company expects the revenue growth to come between 4% and 6% and earnings between $3.49 and $3.56 per share.

Moreover, the company continues progressing in its business model transformation with an RPO of $31 billion, coupled with a record backlog. This provides substantial visibility and confidence in CSCO's future revenue.

"Our operational discipline is reflected in our healthy operating margin and strong cash flow generation, enabling us to return nearly $4 billion to our shareholders in Q4," said Scott Herren, CFO of CSCO. On August 24, CSCO's Board of Directors declared a quarterly cash dividend of $0.38 per common share to be paid on October 26.

The stock's dividend payouts have grown at a 3.3% CAGR over the last three years and a 6.4% CAGR over the past five years. Its current dividend translates to a 3.19% yield, while its four-year average dividend yield is 2.93%. The company's dividend has grown for ten consecutive years.

CSCO's shares have gained 6.8% in price over the past month to close the last trading session at $47.41.

Here is what could influence CSCO's performance in the upcoming months:

Favorable Analyst Estimates

Analysts expect CSCO's revenue for the fiscal 2023 third quarter (ending October 2022) to come in at $13.30 billion, representing an increase of 3.1% from the same period in 2021. The current quarter's $0.83 consensus EPS estimate indicates a 1.8% year-over-year increase. The company has surpassed the consensus EPS estimates in each of the trailing four quarters.

In addition, the consensus revenue estimate of $54.10 billion for the fiscal year 2023 (ending July 2023) represents a growth of 4.9% from the previous year. The consensus EPS estimate of $3.53 for the ongoing year indicates a 5% year-over-year rise. Furthermore, Wall Street analysts expect the stock to hit $55.00 in the near term, indicating a potential upside of 16%.

High Profitability

CSCO's trailing-12-month gross profit margin of 62.61% is 24.8% higher than the 50.17% industry average. Its trailing-12-month EBITDA margin of 30.97% is 137% higher than the 13.07% industry average. Likewise, the stock's trailing-12-month net income margin of 22.91% compares with the industry average of 4.25%.

Furthermore, CSCO's trailing-12-month levered FCF margin of 19.71% is 145.4% higher than the 8.03% industry average. The stock's trailing-12-month ROCE, ROTC, and ROTA of 29.15%, 16.96%, and 12.57% are higher than the industry averages of 7.28%, 3.98%, and 2.75%, respectively.

Discounted Valuation

In terms of forward non-GAAP P/E, CSCO's 13.52x is 28.3% lower than the 18.85x industry average. The stock's 9.56x forward EV/EBITDA is 25.1% lower than the 12.75x industry average. Also, its forward EV/EBIT multiple of 10.48 compares with the industry average of 16.24.

In addition, CSCO's 11.64x forward Price/Cash Flow is 37.6% lower than the 18.65x industry average.

POWR Ratings Show Promise

CSCO's overall B rating equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

CSCO has a grade of A for Quality, in sync with its higher-than-industry profitability multiples.

CSCO is ranked #6 out of 53 stocks in the B-rated Technology-Communication/Networking industry.

Beyond what I have stated above, we have also given CSCO grades for Growth, Sentiment, Momentum, Value, and Stability. Get access to all the CSCO ratings here.

Bottom Line

Despite reporting mixed fiscal 2022 fourth-quarter results, CSCO provided better-than-impressive fiscal 2023 guidance. The company's near-term prospects look bright, driven by strong demand for its products and services coupled with easing supply chain constraints.

Given the company's solid revenue and earnings growth estimates, attractive dividend, higher-than-industry profitability, and low valuation, we think it could be wise to invest in the stock.

How Does Cisco Systems, Inc. (CSCO) Stack Up Against its Peers?

CSCO has an overall POWR Rating of B. One could also check out these other stocks within the Technology-Communication/Networking industry with an A (Strong Buy) rating: Viavi Solutions Inc. (VIAV), AudioCodes Ltd. (AUDC), and Extreme Networks, Inc. (EXTR).

CSCO shares fell $0.07 (-0.15%) in premarket trading Wednesday. Year-to-date, CSCO has declined -23.66%, versus a -12.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.

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