Cisco: World-Class Technology

12/20/2013 8:00 am EST

Focus: STOCKS

John Dessauer

President, John Dessauer Investments, Inc.

Stocks have been the best choice for the last several years. They remain the best choice for dividends and potential capital gains, suggests John Dessauer of John Dessauer Investments.

Meanwhile, Cisco Systems (CSCO) is a world-class technology company with a truly global business. The recent quarter tells a tale of current difficult market conditions, but long run opportunity.

Cisco reported first fiscal quarter results that beat expectations, but sales missed, and guidance for the second quarter was disappointing.

In the opening quarter of this fiscal year, Cisco's adjusted earnings were $0.53 a share—10% better than last year, and better than the $0.51 analysts expected. Revenue grew only 2% in the first quarter and CEO Chambers said that the last two weeks of the quarter were “really tough.”

For this quarter, Chambers said revenues would be down 8%-10% and that adjusted earnings would be $0.45-$0.47 a share. Analysts had expected revenue growth and earnings of $0.52 a share. The stock fell sharply after the report. What should we do?

Here is Morningstar's advice: “We think long-term oriented investors, seeking dividend yield with income growth potential, should consider buying into price weakness.” I agree and here is why: Cisco is financially very strong.

First quarter operating cash flow was $2.6 billion. An additional $15 billion stock buyback program has been announced. That will reduce the shares outstanding by about 12%, boost per share earnings, and reduce cash required for dividends.

According to Synergy Research, Cisco is the leading provider of cloud infrastructure. Cloud is growing fast. In the first quarter, Cisco introduced a game changing, core routing and core switching platform.

Emerging markets account for about 20% of Cisco's product business. Those markets offer excellent long-term growth potential, but are currently soft. That will change as the cycle returns to stronger demand for technology.

Even with the current soft market, Cisco will be able to report adjusted earnings of more than $2.00 a share this fiscal year. The current dividend is $0.68 a share, for a yield of 3.1%. At about ten times earnings, Cisco is a buy.

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