16/04/2558 7 reasons why Cisco Systems stock is now a buy

7 reasons why Cisco Systems stock is now a buy

Cisco Systems Inc. has been in transition. The tech giant has cut thousands of jobs through layoffs, and judging by the swagger that longtime CEO John Chambers has shown lately, the company’s management evidently believes these changes are finally taking hold.
Indeed, Cisco CSCO, +1.58% stock had quite a February, shooting up about 10% after a strong earnings report and a high-octane conference call where Chambers was unabashedly bullish” about the tech giant’s prospects.

But some investors still aren’t convinced.

After that February pop, Cisco shares have drifted steadily lower, reflecting the fact that there is much more skepticism than optimism right now about the company.
So with Cisco about a month or so out from its next earnings report, it’s worth wondering whether this company is really getting its act together and if its stock is now a buy, or whether investors have been right to jump ship.



Don’t forget that Cisco stock has been a heartbreaker for many investors. The company’s stock performance is roughly flat over the last five years compared to about an 80% gain for the S&P 500 SPX, +0.51%  in the same period.

For my money, though, Cisco has made some smart moves lately and is set for outperformance for the better part of the next 12 months. Here are seven reasons why:

1. Earnings momentum: Let’s start with the original reason for Cisco’s pop earlier this year — an earnings report that beat Wall Street expectations handily on both revenue and profits. Specifically, Cisco posted EPS of 53 cents, up from 47 cents per share a year earlier and topping forecasts of 51 cents.
Additionally, revenue rose to $11.94 billion, up 7% from $11.16 billion last year to top expectations of $11.8 billion. This is all extremely good news. Looking forward, order growth was up strongly - particularly in the company’s enterprise segment - and that bodes well for future reports, too.

2. Sharp focus: The spending environment for corporate IT departments seem to be better in 2015 than in previous years, particularly in the areas of cloud computing and security. Cisco is well-positioned to take advantage of these trends. Regarding cloud computing, Cisco’s networking dominance has made it the clear leader in cloud infrastructure market share - the servers and technology that make the cloud possible - with 14% of total revenues in this category to top both Hewlett Packard HPQ, +1.60%   and IBM IBM, +1.13% As for security, Cisco continues to grow ambitiously in this category with efforts that include the well-timed acquisition of Sourcefire in 2013. Being on the right side of these important tech trends will help Cisco’s future earnings.

3. Restructuring is more than cutting costs: Layoff announcements can be self-defeating when a listless company jettisons only rank-and-file to meet short-term goals, keeping inept management in place. Cisco has admittedly let plenty of lower-level employees go, including cutting 6,000 jobs last summer, but the company also has laid-off staff at the vice-president level and higher. And while there is always a risk that layoffs would negatively affect remaining employees, Cisco has been paying out bonuses — reportedly 89% of incentive compensation last year — and has been hiring aggressively in growth areas that it believes in, such as cloud computing. This doesn’t seem like knee-jerk cost-cutting simply to make next quarter’s numbers, but rather a response to a changing market and an organization chart that has been complicated by acquisitions.

4. Fairly valued, with low volatility: While many investors are worried by the market’s volatility and stretched valuations, Cisco has a forward price-to-earnings ratio that is just north of 12.0 right now. That’s quite attractive given that the S&P 500 is valued at 17.4 times forward earnings — and the Nasdaq 100 is at 18.7 times. If you’re worried about overpaying for a new investment, Cisco can give you some peace of mind with its relatively low P/E. A comparatively low beta of 1.3 also means that Cisco isn’t subject to as much volatility as many other stocks in the tech sector.

5. Dividend power: Since instituting its dividend in 2011, Cisco has increased its payout five times — from an initial 6 cents-a-share quarterly to a current per-share dividend of 21 cents. That 250% increase in about four years would be impressive enough, but dividend distributions are still just 39% or so of projected 2015 earnings. That means payouts are not just sustainable, but likely to increase. Not bad considering the current dividend yield for Cisco tops 3%.

6. Big share buybacks: Cisco reported 5.16 billion shares outstanding last quarter, down from almost 5.33 billion a year ago — close to a 4% reduction in share count in the last 12 months. That trend will likely continue after Cisco took steps in 2014 to institute a $15 billion share repurchase plan. In fact, Cisco raised funds for the buyback in part by selling its first debt in three years, and thanks to its enviable balance sheet, the effective interest rate on this debt will only be about 2% over the next few years. It’s not exactly free money, but pretty darn close.

7. Cash cow: Among tech companies that boast massive cash holdings, Cisco is no slouch — with almost $54 billion in cash and investments on the books. This dry powder gives the company plenty of leverage for dividends, buybacks, or acquisitions.

source: www.marketwatch.com