Despite high inflationary pressures and market uncertainties, fundamentally sound top tech stock Cisco Systems, Inc. (CSCO) has shown no signs of slowing down. Thus, we wanted to probe the fundamentals of CSCO to see why the stock could be a buy-and-hold candidate for the long run.
The company exhibited a strong performance in its fiscal second quarter by delivering better-than-expected results in revenue, record non-GAAP EPS, and operating cash flow. For the fiscal year 2023, CSCO expects its revenue growth to be between 9% and 10.5% year-over-year. It expects its non-GAAP EPS to come between $3.73 and $3.78.
On February 27, the company partnered with Mercedes-Benz AG to provide an optimal mobile office experience in its new Mercedes-Benz E Class vehicles. The vehicles will be equipped with Webex Meetings and Calling and utilize Webex AI audio capabilities to enable greater flexibility for the hybrid workforce, along with modern luxury and intuitive features.
Moreover, on January 31, CSCO exhibited its new range of collaboration devices for Microsoft Teams and unveiled the new Cisco Table Microphone Pro, a digital and multi-directional table microphone for hybrid workspaces, along with audio interoperability advancements.
Such innovations are expected to advance hybrid workers’ experience by delivering more inclusivity and choice for meetings while improving the manageability, configuration, and security required by IT.
Shares of CSCO have gained 10.8% over the past nine months and 3% over the past six months to close the last trading session at $48.48, higher than its 50-day and 200-day moving averages of $48.15 and $45.56, respectively.
Let’s closely examine the factors that make it seem like an ideal buy-and-hold option for the long haul:
Solid Financials
For the fiscal second quarter that ended January 28, 2023, CSCO’s total revenue increased 6.9% year-over-year to $13.59 billion, and its gross margin grew 4.7% from the year-ago value to $8.43 billion. The company’s non-GAAP operating income came in at $4.41 billion, up 1.1% year-over-year.
Furthermore, the company’s non-GAAP net income increased 2.6% year-over-year to $3.64 billion, while its adjusted EPS came in at $0.88, an increase of 4.8% year-over-year. As of January 28, 2023, CSCO’s cash and cash equivalents stood at $9.01 billion, up 27.3% year-over-year.
Favorable Analyst Estimates
The consensus EPS estimate of $0.97 for the third quarter (ending April 30, 2023) represents an 11.6% improvement year-over-year. The consensus revenue estimate of $14.40 billion for the current quarter indicates a 12.2% increase from the prior-year period. The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
Outstanding Profitability
CSCO’s trailing 12-month net income margin of 21.26% is 636.2% higher than the industry average of 2.89%. Likewise, the stock’s trailing-12-month EBIT margin and EBITDA margin of 26.58% and 29.74% compare to the industry averages of 6.17% and 11.28%, respectively.
In addition, CSCO’s trailing-12-month ROCE, ROTC, and ROTA of 27.92%, 17.06%, and 11.79% are significantly higher than the respective industry averages of 4.97%, 3.21%, and 1.47%. Its trailing-12-month levered FCF margin of 25.56% is 261.1 higher than the 7.08% industry average.
Attractive Dividend
On February 15, the company declared a quarterly dividend of $0.39 per common share, representing an increase of 3% from the previous quarter. This dividend is payable on April 5, 2023. It pays a $1.56 per share dividend annually, which translates to a 3.22% yield on the current price. Its four-year average dividend yield is 2.99%.
The company’s dividend payouts have grown at a 2.8% CAGR over the past three years and a 5.6% CAGR over the past five years. Moreover, CSCO has a record of 11 years of consecutive dividend growth.
POWR Ratings Show Promise
CSCO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCO has an A grade for Quality, consistent with its higher-than-industry profitability.
In addition, CSCO has a B grade for Stability, as reflected in its beta of 0.95. Also, the stock has a B grade for Sentiment, in sync with its favorable analyst estimates.
CSCO is ranked #3 out of 49 stocks in the B-rated Technology - Communication/Networking industry.
Click here to see the other ratings of CSCO for Growth, Value, and Momentum.
View all top stocks in the Technology - Communication/Networking industry here.
Bottom Line
CSCO’s strategic agreements should drive the company’s growth. Moreover, the tech stock exhibits high profitability and pays a lucrative dividend. As persistent inflation continues to induce pressure on equity markets, CSCO, which has maintained strong momentum despite market fluctuations, could be an ideal buy-and-hold option for this year and beyond.
How Does Cisco Systems, Inc. (CSCO) Stack up Against Its Peers?
While CSCO has an overall POWR Rating of A, investors could also consider looking at its A-rated industry peers: PCTEL, Inc. (PCTI) and Extreme Networks, Inc. (EXTR).
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CSCO shares were trading at $48.74 per share on Monday afternoon, up $0.26 (+0.54%). Year-to-date, CSCO has gained 3.13%, versus a 4.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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