Innovation, Alliances and Fiscal Discipline Buttress Strong Industry Leadership Position, Future Growth Prospects
Shares trade at a discount to 12-month forecasts, peer valuation
Steady dividend growth and financial stability minimize long-term holding risk while offering solid, market-beating upside
R&D innovation, new products, alliances and acquisitions support continued gains in market share
Cisco (NASDAQ: CSCO) is a communications and networking technology company that designs and manufactures Internet Protocol (IP) networking products such as switches, storage, workstations, IP phones, servers, routers and mobile networks. Additionally, the company offers video solutions, unified communications solutions, data centers, network security solutions and wireless products. Cisco serves a variety of clients including retail, enterprise, public institutions, telecommunication companies and service providers in over 165 countries. Of the company’s 74,000 employees, 26,000 are engineers focused on research and development
Cisco has steadily grown revenue and profits over the years, and its newer innovations, partnerships and acquisitions continue to position the company as a leader in the ever-expanding networking arena. The company has 75% market share in the switching market, and could boost its share to 85% if it executes correctly. In addition, the company boasts 53% market share in the Edge Router segment and about 80% in the Enterprise Router segment.
Sales’ growth drivers include a rapidly growing mobile market that will drive router and switch sales, a Bring Your Own Device (BYOD) movement where companies plan to boost network security to support employee mobile devices and IP data convergence (of digital video, IP telephony and web conferencing) where Cisco has positioned itself nicely.
Shares Offer Steady and Rising Dividend Income, Growth Upside
Cisco shares closed at $29.61 (on 2/20/15), up 6% year-to-date and 31% year-over-year. At $29.61 per share, the company has a market capitalization of $151.15 billion. With earnings per share of $1.67, Cisco has a price-to-earnings ratio of 17.7x. The company’s shares are trading towards the higher end of their 52-week high-low of $21.27 – $29.66, well above their 50-day moving average of $27.78 and 200-day moving average of $26.05 as investors remain bullish on industry leadership and future growth prospects.
Shares currently trade at a significant discount to peers despite the company’s dominant position in the market, and offer significant upside, price stability and dividend income over time.
Cisco’s Board approved a quarterly cash dividend of $0.21 per share, annualized at $0.84 per share, to be paid April 22, 2015, to shareholders on record as of market close on April 2, 2015. This dividend represents an 11% increase over the previous quarter’s dividend of $0.19 per share, and offers a dividend yield of 2.87%.
Analysts expect the company’s stock to appreciate over the next twelve months. Most recently, Japanese financial firm Nomura (NMR) maintained a Buy rating on the company’s shares and increased its price target from $29 to $32 on Cisco’s end-to-end solutions and Internet of Things development.
Cisco shares have an average analyst rating of Buy and a consensus target price of $31 which represents an upside of 5.8% over the current trading price, not counting the 2.9% dividend yield.
New Products, Selective Acquisitions Keep Cisco Ahead of the Competition
Smart+Connected: Cisco recently announced the Smart+Connected City Operations Center, a solution to simplify routine operations and emergency/disaster management at Command and Control Centers. The operations center integrates video feeds, applications and sensors onto one display to improve operational efficiency and help cities and enterprises better manage and react to events.
Basic ConfD: The company recently introduced Basic ConfD, a free management agent software that improves the programmability of networks and reduces management costs by 50% over five years while offering excellent scalability.
Internet of Things: As part of Cisco’s push on the “Internet of Things”, the company launched the Cisco Industrial Operations Kit and the Cisco Industrial Ethernet 4000 Series Switches. The Operations Kit helps enterprises more efficiently deploy Field Area Network pilots with quick and easy setup, and improved manageability and control. The Ethernet 4000 is the first 40 gigabyte per second switch that offers high bandwidth, low-latency and double the scalability of existing switches in the market. The switch also provides in-line power for industrial devices and obviates the need to revamp electrical infrastructure.
Nexus 9000: Additionally, the company expanded the capabilities of their Nexus 9000 Series switches to support IETF standard Border Gateway Protocol – Ethernet Virtual Private Network (BGP EVPN). The expansion will be available on the Nexus 7000 switches and ASR 9000 Series routers by the third quarter of 2015.
VersaStack: As part of its collaboration with International Business Machines (IBM), the company introduced VersaStack, an integrated solution that uses Cisco’s UCS Integrated Infrastructure and IBM’s Storwize storage system. VersaStack is cloud-based and uses mobile deployments for big data and analytics, with total cost of ownership that is about 60% lower than rival Hewlett-Packard’s (HPQ) Solution Center.
Sky Admart: Cisco and European entertainment company Sky jointly developed Sky Admart which allows advertisers to market specific advertisements to different households watching the same program. Admart has been launched in the United Kingdom and will be previewed in the United States. The advertisement solution allows advertisers to overcome unicast advertising and deepen the impact of advertising by offering viewer-specific ad that can even be programmed on clients’ DVR services.
New Innovation Center to support “Internet of Things” Focus
In November 2014, Cisco opened their seventh Internet of Everything Innovation Center for research and development of new solutions for local and global markets. The Innovation Center is located in Tokyo, Japan, and will get approximately $20 million in funding over the next 10 years. Cisco plans to initially work with nine existing partners and management estimates that Internet of Things solutions will be worth $870 billion in Japan and $19 trillion worldwide over the next decade.
Partnerships Help Grow Cisco’s Product Portfolio
Videoscape TV: Cisco partnered with pay-TV provider beIN SPORTS to use its Videoscape TV to stream sports videos to over 20 countries in the Middle East and North Africa. beIN Sports has over a million subscribers with high-definition set-top boxes that will use Cisco’s solutions to view live and pre-recorded sporting events.
SARA: Cisco plans to collaborate with noHold Inc., a web-based self-service solutions provider, on a new virtual assistant called Services Automated Resolution Agent (SARA). Besides answering basic questions and performing simple tasks, SARA will offer complex problem resolutions for more advanced back office system issues. Virtual assistants help troubleshoot, diagnose and solve system issues without the need for administrator interference.
Entrepreneurs In Residence: As part of the company’s Entrepreneurs in Residence program, six companies will take part in a six-month collaboration with Cisco to develop and present new products and ideas to investors. The six companies are mobile analytics company Measurence, Internet of Things company ParStream, Italian cloud solutions company PLAT ONE, Japanese Internet of Things company Preferred Networks, wireless sensor company Embedor Technologies and digital infrastructure company Koriist.
Proximus: Belgian telecommunications solutions provider Proximus and Cisco renewed their strategic partnership to continue to develop innovative products through a combination of technology and research expertise for next-generation video delivery, smart and connected cities, and service orchestration and SDN.
Service Exchange Platform: Cisco will partner with healthcare solutions provider Merge Healthcare (MRGE) to provide the Cisco Service Exchange Platform (SXP) to public hospitals in the Kingdom of Jordan. The cloud-based SXP will be used to deliver high quality, affordable radiology and interoperability solutions to patients. SXP will enable collaborations amongst specialists in different locations through data exchange, and improve patient care.
Neohapsis Acquisition – Entry into Integrated Information Security Solutions Market
In December 2014, Cisco acquired security consulting and services firm Neohapsis for an undisclosed amount. Cisco will now be able to more securely move cloud-based and stored data from one location to another. Clients will benefit from fewer IT problems related to security breaches across mobile, desktop and cloud platforms. The company is also beginning development of an integrated information security architecture as part of the company’s goal to provide secure end-to-end solutions.
Litigation with Arista Networks
Cisco filed a lawsuit against smaller rival Arista Networks (ANET) for patent and copyright infringement. Management stated Arista is using the company’s product features and language in their operating manuals. General Counsel for the company suggests that Arista is not being innovative in their development of technology but rather simply building on Cisco’ products. Arista CEO Jayshree Ullal worked for Cisco for 15 years before leaving the company in 2008 to join Arista. Cisco is seeking injunctive relief and damages in the lawsuit.
Veteran Management Team Focused on Growth
John Chambers has served as Chairman and Chief Executive Officer since 1995 and has grown the company from $1.2 billion to $47 billion in annual revenue. Mr. Chambers’ main responsibility is overseeing general strategy to promote continued growth. He is a proven and respected industry executive that has delivered solid shareholder returns.
Kelly Kramer is Executive VP and Chief Financial Officer, responsible for the financial strategy and operations of the company. Mrs. Kramer is in charge of long-term budgeting and forecasting to help grow the company and maintain a strong balance sheet. She has also held several other senior management financial positions within Cisco and with technology company General Electric (GE).
Gary Moore is President and Chief operating Officer, focused on driving profitable growth through asset allocation, operational planning, accountability and measurement. He brings over 30 years of senior IT executive experience.
Second Quarter Revenue Up 7%, Net Income Up 68% to $2.4 billion
For the three months ended January 24, 2015, Cisco had total revenue of $11.94 billion (up 7%), gross margin of $7.09 billion (up 19%), operating income of $2.62 billion (up 57%) and net income of $2.40 billion (up 68%), or $0.46 per share.
The increase in revenue is attributable to an 8% increase in product revenues and a 5% increase in service revenues.
As of January 24, 2015, Cisco had $4.8 billion in cash and cash equivalents, $20.03 billion in long-term debt and $57.73 billion in total stockholders’ equity.
Cisco is the undisputed leader in its space and continues to build on its strengths through R&D innovation, partnerships and acquisitions, while maintaining strong fiscal discipline and delivering steady shareholder value through dividends and opportune buybacks. Shares currently trade at a discount to analyst forecasts and peer valuation multiples, and offer compelling upside over the next five years.