- Reports Q4 2020 results on Wednesday, Aug. 12, after the close
- Revenue expectation: $12.09 billion
- EPS expectation: $0.74
Looking at the share price of Cisco Systems (NASDAQ:CSCO), it's obvious that investors don't expect a huge surprise in the company's latest earnings report due today.
The world's biggest maker of routers has set a low bar for its final quarter of fiscal 2020, projecting its first annual sales decline in three years, hurt by the economic uncertainty amid the coronavirus pandemic.
The company, based in San Jose, California, is considered a proxy for corporate high-tech hardware demand. It's expected to make between $0.72 to $0.74 a share adjusted profit in the final quarter, with revenue declining 8.5% to 11.5%.
These subdued expectations have hit Cisco shares hard: they've dropped about 19% since reaching a multi-year high of $58.19 in July of last year, closing yesterday at $47.19. But despite these headwinds, we still believe Cisco stock is a good value play for long-term investors and could be a bet worth taking.
There are many reasons to believe that the company is well positioned to come out of this sluggish period unscathed due to its strong product mix and attractive incentives for customers.
To take advantage of the pandemic-triggered demand, Cisco is extending a series of free offers and trials for its videoconferencing-service Webex, as well as security offerings as companies moved to remote work during the pandemic. The offerings, company officials noted, could deliver a revenue boost in future quarters.
“We are now running our Webex platform at three times the capacity we were running at in February to manage the dramatic increase in participants,” CEO Chuck Robbins told analysts in May.
The company also added a $2.5-billion Business Resiliency Program to help customers make technology investments while deferring most payments until early 2021. Encouraged by these moves, analysts have made some bullish calls on Cisco in recent weeks.
Cash-Flow Strength
In a recent note, Morgan Stanley upgraded Cisco to overweight, setting a target price of $54 per share, about 14% above where trading closed yesterday. Previously, the bank had an equal-weight rating and $46 per share target on Cisco.
The company is likely to be a growth stock, but it should be able to match earnings growth of the broader index, the bank said. It's note stating:
“On the bottom line, we think Cisco has cash flow flexibility around share repurchases/acquisitions and opex discipline to continue to have earnings growth track close to the S&P.”
Another reason to remain bullish about Cisco is the company’s aggressive diversification drive away from hardware to a software-driven model within new high-growth areas of the market, such as cybersecurity and applications.
Under Robbins, Cisco has made a string of acquisitions to build a software and services business. In May, the company bought San Francisco-based startup ThousandEyes, a network intelligence company that sells software that checks whether the end-user of an internet service is getting what’s intended, and traces how that service is delivered to find potential problems.
Last year, it acquired Acacia Communications (NASDAQ:ACIA), which offers products for cloud operators, for about $2.6 billion, gaining chips and machines that help translate optical signals into electronic data.
These growth initiatives, coupled with the company’s dominant position in North America, where generates the majority of its sales, have positioned the company to outperform when the macroeconomic risks diminish.
In addition to growth, Cisco is also a reliable company that pays regular dividends, making it an attractive option for those seeking to earn steady and exanding fixed income. With its current annual yield of 3%, investors are getting $0.36 a share payout, which has risen 14.20% per year during the past five years.
Bottom Line
Cisco will benefit from a good mix of recurring revenue from its legacy business and its focus on the new high-margin areas. We believe any post-earning weakness after today's release should be taken as an opportunity to buy this quality stock.