Cisco Continues to Chug Along

Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a tough global economic environment, networking giant Cisco Systems (NASDAQ: CSCO) continues to execute very well. While many companies are reporting year over year declines in earnings, Cisco has been reporting year over year growth. In the trailing twelve months (TTM), Cisco has posted an EPS growth rate (TTM over TTM) of 34.71%. In Q1 fiscal year (FY) 2013, Cisco continued its success and posted net sales growth of 6% year over year to $11.9 billion, and net income growth of 18% year over year to $2.1 billion, or $0.39 per share. The company continues to execute its plan of growing net earnings faster than revenue.

In comparison, in their most recent quarter Cisco’s competitors Hewlett-Packard (NYSE: HPQ), Juniper Networks (NYSE: JNPR), Dell (NASDAQ: DELL), and Alcatel-Lucent (NYSE: ALU) posted networking net revenue growth of 6%, 1%, 40%, and negative 4.3%, respectively. HP, Juniper, and Alcatel-Lucent are in the top 5 globally (in terms of revenue) in the Ethernet Switching market. While Dell is not in the top five, the company has been seeing the benefits of its acquisition of Force10. Dell’s server and networking business grew 11% in the quarter, with servers growing 4% and networking growing 40%. The following table shows revenue market shares in switches (IDC).

<table> <tbody> <tr> <td>Ethernet Switch Vendor</td> <td>Q2 2012 Revenue Market Share (%)</td> <td>Q1 2012 Revenue Market Share (%)</td> </tr> <tr> <td>Cisco</td> <td>62.1</td> <td>65.1</td> </tr> <tr> <td>HP</td> <td>9.2</td> <td>8.3</td> </tr> <tr> <td>Alcatel-Lucent</td> <td>3.07</td> <td>2.6</td> </tr> <tr> <td>Huawei</td> <td>2.85</td> <td>2.1</td> </tr> <tr> <td>Juniper</td> <td>2.48</td> <td>2.4</td> </tr> <tr> <td>Others</td> <td>20.3</td> <td>19.5</td> </tr> </tbody> </table>

As shown, Cisco dominates the switching market with a market share of 62.1%, and as of Q2 2012 none of its competitors had double digit market share. Cisco’s switching products are its largest source of revenue and accounts for around 31% of its total net sales. Moreover, Cisco’s peers have been struggling overall. HP, Juniper, Dell, and Alcatel-Lucent have negative EPS growth rates (TTM over TTM) of 166.68%, 63.19%, 23.8%, and 142.72%, respectively. While some of the problems these companies are facing are due to their other businesses, their overall struggles prevent them from focusing more resources on Cisco. For example, Dell and HP have bigger problems with declining PC shipments and the rise of Android and iOS.

Clearly, Cisco is outperforming its peers. CEO John Chambers stated, “We delivered record results this quarter -- with revenue growth of 6 percent and strong earnings per share growth -- demonstrating our vision and strategy are working. Our innovation engine, operational discipline and on-going evolution are enabling us to differentiate in the market."

Furthermore, Cisco continues to return money to shareholders. In the quarter, Cisco paid a dividend of $0.14 per share, or $744 million total, and repurchased 15 million shares at an average cost of $16.44 per share, or $253 million total. In addition, Cisco is executing its share buybacks (relatively) intelligently. As of the end of the quarter, since it started its buyback program, Cisco has repurchased and retired a total of 3.8 billion shares at an average buying price of $20.34 per share. While $20.34 per share is at a premium to the current stock price, it only represents a P/E ratio of about 13.1 (based on TTM EPS). The following chart compares Cisco's stock price and average diluted shares outstanding in the past ten years.

<img src="" />

CSCO Average Diluted Shrs Outs Quarterly data by YCharts

As shown, Cisco has consistently reduced its number of outstanding shares. Also, looking closer at the chart, the big declines in shares outstanding happened during periods of depressed stock price and stayed relatively level during the peaks. While this may seem like an obvious point, there are many companies that pay ridiculous valuations to buy back shares, and it is good to see that Cisco is being more intelligent with shareholder money.

Overall, Cisco is chugging along. The company continues to ride the wave of mobile devices and of an increasingly connected world. In the earnings call, John Chambers summarized the bright future of the networking and server business. Chambers stated, “In a world of many clouds mobility, bring your own device, and the internet literally connecting everything, the network has never played a more central role, connecting people, process, data and things anywhere, anytime across any device” (Seeking Alpha).

While there are near term risks due to the state of the global economy, they are far outweighed by the everywhere connected revolution that is happening. With a dividend yield of 3.1% and a PE of 11.61, Cisco is a good way to invest in the future.

iamgreatness has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dell. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus