Cisco: New CEO and an Improved Outlook

07/03/2015 8:00 am EST


Originally created to provide routers and switches for Ethernet-based data networks, this company has expanded into virtually every niche of the networking market, explains Jim Kelleher of Argus Research.

Cisco Systems (CSCO) has announced a new executive leadership team, chosen by incoming CEO Chuck Robbins.

Robbins unveiled the new executive leadership team, consisting of mainly seasoned Cisco veterans.
The transition is not driven by operational failures and the board wants to give the new CEO every chance to succeed.

The new leadership team has been tasked with accelerating innovation and execution, simplifying how Cisco does business, driving operational rigor, and inspiring the Cisco workforce.

The 49-year-old Chuck Robbins is moving up from SVP of Worldwide Operations to what we expect will be a long tenure in the top job, just like his predecessor, departing CEO John Chambers.

Despite the tremendous upheaval in the technology space, we expect Cisco to grow both revenue and EPS in mid-single-digits for the next two fiscal years.

Cisco has executed the rare feat of nurturing its core business (routing and switching) while simultaneously developing several profitable billion-dollar-plus businesses, which include wireless, security, collaboration, data center, and service provider video.

Amid tremendous upheaval in the technology space related to Cloud, mobility, security, big data analytics, collaboration, and the Internet of Things, we expect Cisco to grow both revenue and EPS in mid-single-digits for the next two fiscal years.

Our financial strength rating for Cisco is High, the top of our five-point scale. Cisco’s cash and investments were $54.4 billion at the end of 3Q15.

Cisco spent $3.2 billion on stock buybacks in the first nine months of FY15, $9.5 billion in FY14, and $6.1 billion in FY13.

On February 11, 2015, Cisco hiked its quarterly dividend by $0.02 per share, to $0.21. On February 12,  2014, Cisco announced a 12% dividend hike, to $0.19 per quarter.

We believe that the company’s hegemony and incumbency in enterprise network and data center and its leadership at the core of carrier IP networks, position Cisco to help clients move toward virtualized, software-defined, and cloud-based infrastructure.

We are reiterating our buy rating on CSCO to a 12-month target price of $36. Appreciation to this level, along with the 2.9% dividend yield, implies a risk-adjusted return of more than 20%.

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