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Repeat after me: Cisco is a buy
The networking giant turned in a great fourth quarter and sees more growth ahead. Here's why Wall Street doesn't understand Cisco -- and why it's a screaming 'buy.'
By Robert Walberg
Sooner or later, the market is going to notice Cisco's impressive operating results. When it does, Ciscos shares are set to jump.
The networking giant delivered another stellar earnings report after Tuesdays close -- posting earnings of 25 cents a share on sales of $6.58 billion. Those figures represented year-over-year growth of 19% and 11%, respectively, making this the seventh straight quarter that Cisco (CSCO, news, msgs) has delivered double-digit sales and earnings growth.
Despite such enviable growth rates, Ciscos stock has spent the last two years treading water. In that time, the stock is up a little more than 10%, while the Nasdaq Composite has jumped more than 30%.
Why the lackluster performance?
Some analysts maintain that Cisco needs to deliver even stronger growth rates if the stock is to break out of its slumber. But exactly how fast does Wall Street expect a company generating over $24 billion in sales to grow? Maybe thats why the ridiculous rumor about the company buying Nokia (NOK, news, msgs) has surfaced in recent days. Cisco doesnt need to make a splashy acquisition to jump-start its business. Business is humming along just fine, thank you very much.
Switching to faster growth
While some of its core businesses such as routers and switches are experiencing flat to single-digit growth, Ciscos Advanced Technologies unit continues to shine. The unit, which consists of the companys security, storage, IP telephony and Linksys segments, posted year-over-year growth of 27%. The Advanced Technologies group comprises nearly 18% of total sales. That the company has been able to move its business into faster growth markets while maintaining a rock-solid balance sheet is a tribute to management.
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Unfortunately for Cisco shareholders, it looks as though the sluggish performance in some of its old-line businesses will keep it from hitting Wall Street sales targets for next quarter and all of fiscal 2006. Management noted that next quarter's sales will be flat to down slightly compared to fourth quarter numbers, which would leave revenues below the current street estimate of $6.63 billion. (In early trading Wedneday, Cisco shares were getting slapped around, falling more than 5%).
Also of concern are the companys ongoing challenges in the Chinese and Japanese markets -- both of which have been troublesome in recent quarters. Fortunately, the company is making up for weakness in these markets with strength in places such as India, where fourth-quarter sales grew 35% compared with the year-earlier period and 40% compared with the third quarter.
The company-wide sales estimates shouldnt be overly alarming. Cisco has adopted a more cautious approach to guidance in recent years and has consistently delivered slightly better-than-expected results. Nevertheless, managements guarded tone wont serve the stock particularly well over the next couple of days.
Forget the rumor -- buy the reality
Even so, the downside risk in the stock at todays prices is limited. Cisco already trades at a modest discount to the market and its peers. It has a great brand, superb management, better-than-industry margins and an impeccable balance sheet. Theres really very little reason to think that the stock will spend much more time sporting discounted valuations.
As management continues to execute its strategy of smoothly transitioning its business to higher-growth markets and injecting new life into its core units with new products, Cisco's share price should jump. The gains might not come fast, but come they will. A move back to the $23 to $24 range would represent a nice 17% to 22% gain. Note the stock is up roughly 11% since I added it to my Street Patrol portfolio back in February.
On a final note, lets look at the rumor that Cisco might buy Nokia. Its pure fiction -- the kind you take to the beach with you on a hot summer day. Here's why:- Cisco historically makes small, targeted acquisitions -- not big, splashy ones.
- Cisco and Nokia are at the opposite ends of the technology business, making a marriage highly unlikely.
- While both companies have experienced recent management changes, that doesnt mean that either would agree to be bought out by the other -- especially given the egos and geographic considerations.
Both stocks have been relatively flat in recent months, so my guess is traders were merely looking for some reason to get excited. But overheated rumors are no reason to get fired up about Cisco's shares. What is exciting is Cisco's consistent execution and double-digit growth rate.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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