CISCO SYSTEMS INC. $24 (Nasdaq symbol CSCO; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 5.4 billion; Market cap: $129.6 billion; Price-to-sales ratio: 2.7; Dividend yield 2.8%; TSINetwork Rating: Average; www.cisco.com) is a leading maker of hardware and software that links and manages computer networks. The company’s hardware includes routers, local area network (LAN) and asynchronous transfer mode (ATM) switches, and server computers. Cisco mainly sells this equipment to large businesses and government agencies.
The company continues to profit as wireless carriers upgrade their networks to handle rising demand for video and other media. Cisco is also benefiting from a major restructuring plan, which included selling its low-margin consumer products businesses and focusing on more profitable operations, like software.
Mobile boom spurs results
Cisco’s revenue rose 34.6%, from $36.1 billion in 2009 to $48.6 billion in 2013 (fiscal years end July 31). Earnings jumped 77.1%, from $6.1 billion to $10.9 billion. Due to fewer shares outstanding, earnings per share rose at a faster pace of 92.4%, from $1.05 to $2.02.
The company continues to invest heavily in new technologies. In 2013, it spent $5.9 billion, (or 12.2% of its revenue) on research. That’s up 8.3% from $5.5 billion (or 11.9% of revenue) in 2012.
This spending is helping Cisco develop new products that should help it stay ahead of its competitors. For example, its new nPower chip can process 400 gigabits of data per second, compared to 140 gigabits for its older model. This new chip will help network operators cope with rising data traffic, particularly as more mobile devices automatically transmit messages and other data in response to certain events.
Smart acquisitions fit nicely
Cisco is also adding to its expertise by purchasing smaller companies. Recently, it agreed to pay $415 million for privately held Whiptail. This firm specializes in solid state memory drives, which use flash chips instead of magnetic discs. Because they have no moving parts, solid state drives use less power and transfer data quicker than regular drives.
The company can easily afford these outlays. As of July 27, 2013, it held cash and investments of $50.6 billion, or $9.39 a share. Its long-term debt of $12.9 billion is just 10% of its market cap.
The stock moved down recently after slowing sales in China and other developing markets prompted Cisco to cut its revenue forecast for the current quarter. (Overseas markets supply 40% of its overall revenue.) In response, the company now plans to cut 5% of its workforce. Cisco expects severance and other costs to total $550 million.
Customers trust Cisco
The stock trades for 12.3 times the $1.95 a share that Cisco will probably earn in fiscal 2014. That’s a low p/e ratio in light of the company’s high research spending. As well, Cisco’s wide range of products and long-term relationships with its major customers give it an advantage over its competitors. The $0.68 dividend yields 2.8%.
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The Successful Investor Inc. and its affiliate Successful Investor Wealth Management (referred to hereafter as TSI Network) know that you care how information about you is used and shared, and we appreciate your trust that we will do so carefully and sensibly. This notice describes our privacy policy. By visiting websites owned by or associated with TSI Network, you are accepting the practices described in this Privacy Policy.
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