Though shares of the network hardware company Cisco Systems (CSCO) hit a 52-week high today, the stock is only up +10.57% year to date (YTD), which is significantly lower than the +35.36% the Nasdaq Composite has achieved:
So, why is Cisco's underperforming, will it rebound, and is now a good time to scoop up shares of the stock?
About CiscoFounded in 1984, San Jose, CA-based Cisco is a leading manufacturer and seller of networking hardware, software and services. Its key products are routers and switches which connect networks together. It also offers other products like firewalls, security appliances, and wireless solutions.Moreover, Cisco has operations worldwide, employing more than 83,000 employees.
Rising Revenue and Profits
Cisco's underperformance can be attributed to the muted demand from customers due to supply chain constraints. Orders actually slid by 23% in the latest quarter. Worryingly, this follows a 22% drop in the second quarter.
However, the company's revenues and profits have continued to display growth even amid this demand slowdown, surpassing analyst expectations. While total revenues grew by 13.5% from the prior year to $14.6 billion, net income grew by 5.5% to $3.2 billion. Cash flow from operating activities also improved by an impressive 43% yearly to $5.2 billion, highlighting the company's operational strength.Remaining performance obligation, a key metric which indicates a company's future revenues from contracts already signed, increased by 6% from the previous year to $32.1 billion. The company expects a revenue recognition of 53% from this, indicating revenue visibility for the near term.
However, the gross margin remained almost flat at 65.2% compared to 65.3% in the previous year.
Healthy Dividends and Buybacks
Cisco's management has aided the share price of the company by opting to reward shareholders through periodic dividends and buybacks.
In the third quarter, Cisco returned about $2.9 billion to its shareholders through dividends and buybacks. While a dividend of $0.39 per share amounted to a total dividend of $1.6 billion, the total share repurchase amounted to $1.3 billion.
Moreover, the company has $12.2 billion left under its stock repurchase program indicating that the company's share repurchase activities are expected to continue.
Valuations
Compared to it peers, like Dell (DELL), Hewlett Packard (HPE), VMware (VMW) and Juniper (JNPR), CSCO is not undervalued.
Cisco's Forward Price-to-Earnings (P)E stands at 17.05 which is more than HPE (11.81) but less than Dell (20.79), VMware (42.76) and Juniper (19.76).
In terms of the Price-to-Sales (PS) ratio, CSCO's is 3.80, which it is lower than only VMware at 5, but higher than Dell (0.41), HPE (0.75) and Juniper (1.72).
Finally, for the Price-to-Cash Flow ratio, Cisco appears right in the middle, when compared to its peers. Cisco's Price-to-Cash Flow ratio currently stands at 11.77, higher than Dell's (7.09) and HPE's (5.06). However, it is way lower than Juniper's 98.19 and slightly lower than VMware's 13.58.
Analyst Estimates
Analysts have an overall rating of “Moderate Buy” on the stock. Out of the 20 analysts covering the stock, 5 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating and 13 have a “Hold” rating on the Cisco stock. The mean target price of $56.18 (10.6% upside potential from current levels) and a high target price of $73 (43.7% upside potential from current levels).
Final Takeaway
Though CSCO hit a 52-week high today, I am neutral on the stock at these levels. I question whether the current headwinds that are being faced by Cisco, in the form of sluggish demand and supply chain constraints, really are transitory in nature.
I do like it's sound 3% dividend yield but the company's valuation isn't compelling from a value perspective. So, in my opinion, CSCO is a Hold and I will reevaluate after its next earnings report, scheduled on August 16th.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
