Cisco Bucks Tech's Weak Revenue Trend

 | May 21, 2013 | 10:00 AM EDT
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After struggling the past few quarters, Cisco (CSCO) bucked the difficult technology industry trends of weaker revenue and order trend rates with its May 22 earnings call.

While all of the major systems-centric tech providers such as IBM (IBM), EMC (EMC) and Oracle (ORCL) reported weaker than expected revenue and order growth trends, Cisco reported positive and in-line revenue growth of 5.4%. More importantly, order rates picked up and rose to 4% after two flat quarters. Cisco's key book-to-bill ratio is now greater than 1.

Cisco highlights included outstanding growth rates in emerging technologies such as service provider video up 30%, wireless up 27%, service provider WiFi up 100% and data center up 77%.

The company reported better than expected gross margins of 63% on strong operational performance. And to investors' surprise, the company also recorded a positive 1% growth rate in the public service customer segment, an area of negative and volatile performance over the past year.

Cisco's stock was up more than 10% after the strong quarterly report and outlook.  

Even after last week's gains, Cisco still sells at a modest 12 times earnings. Based on its fiscal year, which ends in June, Cisco is expected to report $2.01 EPS for 2013 and $2.13 for 2014. There is upside to these numbers because management has a history of providing conservative guidance. 

Furthermore, management has done a remarkable job over the past 18 months of completely retrofitting the company. Cisco pushed into new technologies of video, wireless and software to offset the maturity of its switching and routing business. Management pruned unprofitable operations, outsourcing manufacturing and cut costs to boost margins. 

Adding to Cisco's attractiveness is its pristine financial position. The company has consistently repurchased billions of dollars worth of shares each year, resulting in a 15% reduction in the share base over the past decade.

Management is now increasingly turning its attention to paying higher dividends to boost investor returns. The board implemented a 2.83% dividend. With a fortress-like balance sheet of $30 billion in net cash or $5.57 per share and an income statement that generates more than $12 billion in annualized cash flow per year or $2.40 per share, the board has more than enough financial flexibility to further raise the dividend.      

Overall, we are very positive on Cisco, (even after last week's run-up).  Management has done a wonderful job turning the franchise around after some competitive missteps. The shares are still cheap at 12 times earnings. The company is increasingly looking to reward shareholders via higher dividends.  The current yield is generous and should continue to grow at a healthy rate.

We believe Cisco is a solid buy as it should be timely, has good business momentum, has meaningful stock price upside and provides a healthy income stream while investors wait. 

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