CSCO stock dropped nearly $2 per share since announcing its quartherly result and downbeat forecast last night.
This morning I bought on the dip and picked up more CSCO at $17 per share. With shares trading at 10x calendar 2012 and 9x calendar 2013 estimates, and trading at less than 7x calendar 2012 and 6x calendar 2013 estimates ex-cash, a 10% free cash flow yield, a 2% dividend yield, and almost $6 per share net cash, I do not see much downside.
I think upside from here is more likely. Cisco has dramatically improved its competitive position and is taking back share in its core enterprise switching and carrier routing businesses. And margins have been relatively stable for the past six quarters.
CEO John Chambers sees a greater than 50% probability that the second have of this year will be better than the first half. Additionally Cisco has seen a significantly improvement in its competitive position in core enterprise switching and service provider routing markets, which comprise 50% of CSCOs revenue and over 50% of its profits. Consistent with industry checks, over the next year CSCO is expected to continue to take market share away from HP and Juniper Networks.
Based on its gross margin, operating margin, and net margin, CSCO converts a larger percentage of its revenues to profits than most other companies in the Communications Equipment industry. Furthermore, the company is profitable with an operating margin of 20.09%.
CSCO pays an annual dividend of $0.32 and, at its current price, yields 1.70%
However here are some concerning comments from John Chambers’ conference call last night:
“When I talk to our customers, they do not see that incurring in their environment and traditionally even the areas that have been going slow like Service Providers and also the Financial Services Industry group have said their plans are to spend more in the second half of the year. However…in the very next sentence they said, we are waiting to see what happens in Europe and what happens with government policy.”
“When I talk to my peers in the industry and make no mistake, I’ve been doing that, we can almost finish each other’s sentences on what we’re seeing around the globe from the Unified customers. Again, not a view that things are turning down, but just very steady improvement in an uncertain and cautious wait-andsee type of environment from that perspective.”
“When you talk to people who say [they are] going to pick up [their] spending in the second half of the year, [they say they] feel very good about how [they are] positioned and they say that, i.e. the retail banking investment group, i.e., some of the service providers, et cetera. Then in the very next breath they say but it depends on what happens on a global and macro scale.”