Is Cisco (CSCO) Still A Buy After Earnings Fall 25%?
Today, I answer the question – Is Cisco (CSCO) Still A Buy After Earnings Fall 25%?
Here’s a quick recap of the previous two articles on Cisco about why you should consider buying them, before we get to today’s article. If you want to read the past articles in full, use the links above.
From The NASDAQ Article Linked Above
Unlike yesterday’s stock that you’ve heard of… Unless you’re in the IT space you likely haven’t used and may not have heard of Cisco Systems (CSCO).
Cisco “engages in the design, manufacture, and sale of Internet Protocol based networking products and services related to communications and information technology industry.”
In other words, Cisco and its products and services help run the internet and help you stay connected.
The company was founded in December 1984 at the dawning of the Internet Age.
While not as outright dominant in their market as stock #1 yesterday, Cisco still owns much of its market.
According to its own estimates, Cisco owns approximately 16.2% market share of Garner SD-WAN Enterprise Network Equipment market as of the 2nd quarter 2019. And is the largest revenue producer in this arena.
Gartner SD-Wan is networking equipment that allows you to get on the internet.
Cisco helps some of the largest companies in the world with their IT and networking infrastructure as you can see in the graphic below.
Cisco is #1 in this arena and has been for years due to its competitive advantages.
Namely its trust ability, distribution network, and economies of scale. These advantages allow Cisco to keep competitors at bay. And allow the company to earn huge profits and cash flow which I’ll talk about more later.
Specifically when it comes to trust, if your entire company runs on the internet – like most businesses do today – you need to have trust that the network is going to remain working and stable so you can stay in business.
Cisco’s built up that trust as the largest and best network hardware company in the world over the last several decades.
Cisco runs much of the internet now and will continue doing so in the future due to its competitive advantages mentioned above.
Plus, also like Stock #1 yesterday, with the rise of the Internet of Things (IoT) soon almost everything we use daily will have semiconductors and sensors in them.
From the shoes you wear showing you how to run better… To chips in your body showing you when you need to go to the doctor… To smart traffic lights around cities minimizing rush hour traffic.
In the coming years and decades almost everything we use will have semiconductors and sensors in them showing you data on how to avoid things. Or how to do them better and faster.
With Cisco’s dominance in this arena, its well positioned to continue dominating now and well into the future.
Plus, its enormously profitable now too…
Over the last decade Cisco’s produced an average 23.8% operating margin every year over the last 10 years. I look for any company to produce above 10% margins on a consistent basis to consider a stock for investment.
It also produces a ton of cash too…
Its FCF/Sales margin averaged 24.4% per year every year for the last decade… I look for anything above 5% on a consistent basis to consider an investment.
Free cash flow or FCF is the amount of money that’s left over after all costs to run the company now and to grow it. This number is also after paying taxes too.
Think of FCF as the ultimate profitability of a company. Because its money the company makes after paying all its bills.
Cisco meets and surpasses my threshold on both important metrics… These are important because they show Cisco produces profits and cash to continue funding operations and growth.
These enormous profits also make Cisco a super safe investment as well.
And on top of all this, Cisco also pays a 3% dividend currently.
With all this you figured Cisco stock would be expensive right now… But it’s not.
As of this writing, its selling at a P/E of 18.7 and a P/FCF of 13.
I look for potential investments to sell below 20 on both metrics. And Cisco is well under these.
Cisco will be around for decades to come – no matter what the economic situation becomes.
And it will make you money both today and well into the future because of the things outlined above.
If you’re investing now, look at adding Cisco to your research pile.
From The 3 Reasons Article Linked Above
Its 12.6% Stock Fall Makes No Sense
This was not proved out when Cisco released its most up to date quarterly report on August 12th 2020… At least on first glance.
Revenue decreased 9% to $12.2 billion in the 4th quarter of its 2020 financial results. This compared to $13.4 billion in the 4th quarter of 2019.
And this is most of what you saw in analysts reports and the mainstream news.
News that sent its share falling 12.6% from $48.10 per share the day before it released these numbers. To $42.06 per share as of this writing.
Was this drop worth it?
In my opinion no.
Net income rose 19% to $2.6 billion in the 4th quarter of 2020 compared to $2.2 billion in the 4th quarter of 2019.
For the full year 2020 revenue was only down 5% to $49.3 billion. And net income was only down 1% to $13.7 billion in the full year 2020 results.
Plus, cash and cash equivalents rose by almost $1 billion to $29.4 billion in the quarter… While its debt fell from 40.9% total from $24.7 billion in the 4th quarter of 2019 to $14.6 billion in the 4th quarter of 2020.
Its backlog of deferred revenue also rose… That’s now up to $20.4 billion which is an 11% increase on the prior year.
This means already today that Cisco now has $20.4 billion worth of revenue in the coming year… And its financial year just ended.
In other words, Cisco’s revenues fell slightly… But its cash levels increased while its debt levels fell significantly. And its backlog of future revenue also increased… Yet the stocks fallen 12.6% since the release of its quarterly info.
But these things shouldn’t overshadow that’s its an even healthier company now than it was at this time last year according to its numbers.
That its prospects going forward over the long term are still excellent.
And that because of its huge profits and cash flows it kept its dividends and buybacks in place.
This is reason #2…
Dividends And Buybacks
Plus, unlike most companies it kept its dividend and its share buyback program in place during this pandemic.
As of this writing its now got a 3.4% dividend yield.
In the last 12 months its paid out $6 billion in dividends to shareholders. And another $2.6 billion in buybacks. And it still has room to grow both due to its profits and cash flows.
Think of share buybacks as part of a pizza.
When Cisco buys back more shares, the same size of pizza stays… But fewer people are around to eat it so the piece of pizza you have gets bigger and bigger over time.
If a company keeps doing this over long periods like Cisco has, the same size of pizza remains but eventually you’ll get to eat more of the pizza… Or own more of the company and its profits and cash flows in this case.
It can do this because its still producing enormous profits and cash flows. And will continue doing so going forward.
Its shares falling gives you a great opportunity to buys its stock at a now even cheaper price though.
And this is reason #3…
It’s Even Cheaper Now
As of the last article Cisco was already cheap…
As of this writing, its selling at a P/E of 18.7 and a P/FCF of 13.
But it’s even cheaper now…
Now, its P/E is 15.9.
Its P/CF is 11.6.
And its forward P/E is 14.7.
I look for these metrics to be below 20 to consider buying a stock.
Cisco was already cheap 2 months ago… But it’s even cheaper after its recent sell off.
This means Cisco stock offers you a margin of safety in investing terminology.
A margin of safety means you’re buying a safe investment… And this makes the investment even less risky.
A margin of safety also means that you should expect to hear higher investment returns if you’re to buy its shares after this fall than before.
Cisco will continue to not only survive but thrive during this pandemic and after due to its unique competitive advantages.
For the 3 reasons in this article, and the ones in the previous article, we recommend you buy Cisco stock for the long term.
This thesis over two articles to buy Cisco stock continued playing out when it released its most up to date quarterly info on November 12th, 2020.
Revenue fell 9% in the year to year quarterly period to $11.9 billion.
Earnings per share fell 25% in the year to year quarterly period to $0.51 per share.
While cash flow from operations rose 14% in the year to year quarterly period to $4.1 billion.
Cash levels rose to $30 billion.
And deferred revenue rose $10% in the year to year quarterly period to $20.5 billion.
This is a very similar quarter to the one it last reported… Almost exact actually.
But instead of a large fall in its share price like last time… Its shares rose 6.6% on this quarterly news.
Honestly not sure. And frankly it doesn’t matter.
What matters is what I said last time about these being solid results that put the company in a healthier position going forward.
That remains here.
Plus, its still cheap enough to buy too.
Its P/E is now 16.8.
Its P/CF is 11.
And its forward P/E is 13.6.
Meaning its slightly more undervalued now than it was back in August.
This means if you buy its stock today, it offers you enough margin of safety… This makes it less risky and means you should expect to earn higher investment returns going forward.
For these reasons I still recommend you buy Cisco stock – even after its earnings fell 25% in the year to year quarterly period.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.