Cisco's Growth Should Continue With an Improving Economy

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

Cisco (NASDAQ: CSCO) reported earnings and showed higher than expected revenue growth. Earnings growth was impressive as well, but it is revenue that has really dogged the company for some time. The perception that the company had a revenue growth issue has kept the stock down. Top line growth has been consistent, but it seemed like the market expected this to stall at some point and Cisco would spin its wheels. The company was priced like it was spinning its wheels already, because perception is a powerful thing.

The Cisco situation

The company has been showing revenue growth regularly as mentioned. It has also been growing profit faster than revenue, which is one of the key ways larger companies create value for shareholders. At some point, a company gets so big that growth will be limited in current businesses. New opportunities take time to properly develop, and there can be lulls in top line growth. Personally, the revenue growth at Cisco has impressed me consistently, but the market seemed not to care. Net income growth was just as impressive and in the previous quarter the growth was a great 15%.

The company has had over $45 billion in cash on the balance sheet for a while now. It is edging up with each earnings report, but since I started following it closely, the company has had a ton of cash. Debt has stayed low, though it is somewhat surprising that the company has any debt on the balance sheet considering its growing cash balance and its almost $3 billion in free cash flow.

Despite all these good things, the company has a three-year return of 6% and a one-year return of 51%. The one year is not bad, but the three year is disappointing. During my initial write-up of this article, the three-year return was (8)%. Cisco has been a laggard for a decade, but that seems unwarranted given the strength of the company. It might finally be seeing earnings actually move the stock. Most of those gains were made the day after earnings, and since then, the stock has flattened out again.

Harmed by association

The market tends to associate the results of one company to another company. This might not always be the best thing, especially when the company has clearly shown a divergence, but it is a reality that must be lived with. This happened when Juniper Networks (NYSE: JNPR) reported its earnings and missed on revenue. The miss was minor in my opinion, just $10 million out of quarterly revenue over $1 billion, but it was indicative of the growth problems that Juniper is facing. Its revenue has been flatter than Cisco's.

When I saw the earnings report for Juniper, I thought that it was an issue intrinsic to the company. I did not think it would adversely impact Cisco, though I was not expecting some of the regional growth that Cisco was seeing, especially in the United States. Cisco would probably just report revenue in line with some growth, but not enough to turn heads. It did better than that and has finally started making real gains.

When Juniper reported its "lackluster" earnings, Cisco dipped into the red along with it. Cisco moves so slowly that I want to see consistent green days, but every time Cisco makes some gains, something sends it back down to the $20-$21 area. This is why I closed my calls at the post earnings high for Cisco, and am looking for re-entry.

More company specific devastation

Juniper is not in bad shape. It is struggling to find growth, but is not in the recurring loss situation that Alcatel-Lucent (NYSE: ALU) finds itself in. Juniper is still making money, and net income ttm seems on the mend. The new PTX boxes are impressive, but Juniper does need to explore some new lines of business to grow revenue faster.

I will be keeping an eye on Juniper's product development to judge when it will start seeing better results and its stock starts to move into the $20s. Alcatel-Lucent has a bunch of products, but it needs to focus on cutting expenses more. The last quarter was unimpressive, even though the earnings call touted it as progress in its plan to turn itself around. Saving $100 million is insignificant to me, and I want to see something more severe. The new restructuring plan is in the same line as the last one, but with a broader scope. Also, how quickly and decisively it is carried out will be important.

The first quarter was the last one for outgoing CEO Ben Verwaayen, and that might account for the lack of bold progress on its initiatives. The CEO change brings some more optimism to the plagued company since the new CEO, Michel Combes, has a history of cutting expenses. With the new plan laid out, it remains to be seen if this leads to any tangible effects. There is always pre-judging, but I do not see this new restructuring plan as a rehash. If it is carried out effectively, it can make all the difference.

Conclusion

Cisco is a company that I really like for being a fantastic company with a less than fantastic share price history. I felt that given the current stock market environment, it would not remain in its near-$20 range much longer, and it has gone to $24. I did sell my calls and lock in gains from its post-earnings run, but will look for some new calls.

Juniper has a lot of issues surrounding it, but remains a profitable company. I will be watching it closely for a return to moderate revenue growth. For Alcatel-Lucent, I will be paying attention to profits and cash flow. Networking is still soft, so it is fine if the company positions itself to profit from the growth that comes in the industry later.

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Nihar Patel has the following options: Long Jan 2014 $2.5 Calls on Alcatel-Lucent (ADR) and Long Jan 2015 $3 Calls on Alcatel-Lucent (ADR). The Motley Fool recommends Cisco Systems. 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!

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