Cisco Systems (CSCO): Buy or Hold Pre-Earnings?

Cisco Systems, Inc. (CSCO) is scheduled to report its second-quarter results on February 14. Wall Street expects the company to post lower earnings and revenue over the prior-year quarter. In this piece, I have discussed why it could be wise to buy the stock now.

For the second quarter, CSCO’s EPS and revenue are expected to decrease 4.9% and 6.5% year-over-year to $0.84 and $12.70 billion, respectively. The company has a stellar earnings history, having beaten the consensus EPS estimate in each of the trailing four quarters.

CSCO started fiscal 2024 on a strong note as it reported solid earnings and revenue growth in the previous quarter. CSCO’s Chair and CEO Chuck Robbins said, “We had a solid start to fiscal 2024 with the strongest Q1 results in our history on both revenue and profitability. We are confident in the foundation strength of our business and future growth opportunities fueled by AI, Security, Cloud, and Observability.”

CSCO’s CFO Scott Herren said, “In Q1, we delivered revenue and EPS at the high end or above our guidance range, generating strong operating leverage. We also saw double-digit year-over-year growth in software revenue, product ARR and total RPO. After customers implement large amounts of recently shipped product, we expect to see product order growth rates accelerate in the second half of the year.”

“We are committed to delivering operating leverage and increasing capital returns to our shareholders,” he added. After reporting its first-quarter results, CSCO reduced its full-year revenue forecast. The company has forecasted its fiscal 2024 revenue to be between $53.80 billion and $55 billion. Its non-GAAP EPS is expected to come between $3.87 and $3.93.

For the second quarter, CSCO forecasted its revenue to come between $12.60 billion and $12.80 billion. This revenue guidance was lower than Street estimates. The softer revenue guidance was due to a slowdown in orders from customers as they deployed the previously purchased Cisco products.

Its non-GAAP gross margin rate for the second quarter is expected to be between 65% and 66%. In addition, its non-GAAP operating margin rate is expected to come between 31.5% and 32.5%. Also, its non-GAAP EPS is expected to come between $0.82 and $0.84.

During the second quarter, CSCO announced new business metrics in Cisco Cloud Observability. Powered by the Cisco Observability Platform to enhance business context for modern applications running on Amazon Web Services (AWS).

This latest release also supports integration with AWS services and application performance monitoring (APM) correlation and provides end-to-end visibility into the performance of cloud-native applications. Also, CSCO unveiled the Cisco AI Assistant for Security during the quarter. The AI assistant will help customers make informed decisions, augment their tool capabilities and automate complex tasks.

On December 31, 2023, CSCO announced its intent to acquire Isovalent, which is a leader in open-source cloud-native networking and security, to bolster its secure networking capabilities across public clouds. The acquisition of Isovalent will build on the Cisco Security Cloud vision, an AI-driven, cloud-delivered, integrated security platform for organizations of any shape and size.

CSCO’s executive VP and general manager of Security and Collaboration, Jeetu Patel, said, “Together with Isovalent, Cisco will build on the open-source power of Cilium to create a truly unique multicloud security and networking capability to help customers simplify and accelerate their digital transformation journeys.”

According to reports, CSCO is planning to cut thousands of jobs as it looks to restructure its business.

CSCO pays a $1.56 per share dividend annually, which translates to a 3.12% yield on the current share price. Its four-year dividend yield is 3.07%. The company’s dividend payouts have grown at CAGRs of 2.70% and 3.40% over the past three and five years, respectively. CSCO paid a quarterly dividend of $0.39 on January 24, 2024.

CSCO’s stock has gained 7% over the past nine months and 5.8% over the past year to close the last trading session at $49.99.

Here’s what you might want to consider ahead of its upcoming earnings release:

Robust Financials

CSCO’s total revenue for the fiscal first quarter ended October 28, 2023, increased 7.6% year-over-year to $14.67 billion. The company’s non-GAAP net income increased 27.6% year-over-year to $4.53 billion. Its non-GAAP EPS came in at $1.11, representing an increase of 29.1% year-over-year. In addition, its non-GAAP operating income increased 23.9% year-over-year to $5.37 billion.

Mixed Analyst Estimates

Analysts expect CSCO’s EPS and revenue for fiscal 2024 to decline 0.6% and 4.4% year-over-year to $3.87 and $54.47 billion, respectively. Its fiscal 2025 EPS and revenue are expected to increase 3.8% and 3% year-over-year to $4.01 and $56.08 billion, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, CSCO’s 12.92x is 51.3% lower than the 26.53x industry average. Likewise, its 10.06x forward EV/EBIT is 52.1% lower than the 21x industry average.

However, its 2.72x forward non-GAAP PEG is 31.2% higher than the 2.08x industry average. Also, its 3.73x forward Price/Sales is 23% higher than the 3.03x industry average.

High Profitability

In terms of the trailing-12-month gross profit margin, CSCO’s 63.69% is 30.6% higher than the 48.76% industry average. Likewise, its 31.18% trailing-12-month EBITDA margin is 246.2% higher than the industry average of 9.01%. Furthermore, the stock’s 28.39% trailing-12-month EBIT margin is 499.6% higher than the industry average of 4.74%.

POWR Ratings Show Promise

CSCO has an overall B rating, equating to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCO has an A grade for Quality, consistent with its high profitability.

Its 0.88 beta justifies its B grade for Stability.

CSCO is ranked #5 out of 46 stocks in the Technology – Communication/Networking industry. Click here to access CSCO’s Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

Although CSCO’s earnings and revenue are expected to decline during the second quarter, CSCO's long-term prospects look bright as it aims to boost its recurring revenue from subscription-based software and services contracts, and the acquisition of Splunk is a step in that direction.

The company is aiming to expand its presence in the cybersecurity market through its acquisition of Splunk and Isovalent. Its software offerings are expected to strengthen its top and bottom lines.

Given its robust financials, stable dividend payments, and high profitability, it could be wise to buy the stock now.

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

While CSCO has an overall grade of B, equating to a Buy rating, you may also check out these other A (Strong Buy) or B (Buy)-rated stocks within the Technology – Communication/Networking industry: Gilat Satellite Networks Ltd. (GILT), Ceragon Networks Ltd. (CRNT), and AudioCodes Ltd. (AUDC). To explore more Technology – Communication/Networking stocks, click here.

What To Do Next?

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CSCO shares were trading at $49.45 per share on Tuesday afternoon, down $0.54 (-1.08%). Year-to-date, CSCO has declined -1.36%, versus a 4.10% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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