Key points
- Cisco Systems posted a decent quarter and outperformed expectations, but the forecast sapped market appetite.
- Cash flow is solid, with an improving margin, and provides ample funds to pay dividends and repurchase shares.
- Analysts support this market and see it rising by the end of the year.
- 5 stocks we prefer to those of Cisco Systems
Cisco Systems NASDAQ: CSCO released a decent second-quarter report, but guided lower for the third quarter, leaving the market less than inspired. As cold as the guidance is, someone is getting into buy the dip, and it appears that value-oriented, long-term oriented income investors are the culprits. Weak results or not, the company produces solid cash flow, pays a healthy dividend, grows its distribution, and is cheap to buy. Trading at 13.5 times earnings, it is among the cheapest technology stocks on the market and pays an above-average yield.
Cisco’s dividend is among the best in the tech universe and yields more than 3.0%, with shares near a one-year low. The company’s earnings outlook is narrowed compared to analysts’ forecasts, but is still broad on capital returns. The new guidance places the company’s 2024 payout ratio near 44%, including the new 3% increase announced in the release. The balance sheet is also solid and shows no warning signs, thanks to net liquidity and low financial leverage.
The cash flow also allows for substantial share repurchases. The company bought back $1.3 billion in the second quarter, bringing its average year-to-date share count down nearly 1%. The company has $8.4 billion left under the current authorization with no expiration date, worth another 4% of market cap, so buybacks are expected to continue into F2024 and F2025.
Cisco had a mixed quarter as it transitions to a subscription model
Cisco Systems had a tough second quarter, producing revenue of $12.8 billion, a decline of 5.9% from last year. The good news is that revenues beat consensus and the weak strength carried over to profits. Segmentally, product revenue fell 9% on a 12% decline in networking, the core business, while services growth made up the difference. All regions were weak, led by a 12% decline in Asia-Pacific. Within the Services segment, subscriptions increased 5%, with ARR increasing 6% and remaining performance obligation increasing 12%.
The news on margins is good. The company expanded its gross margin across all segments on a GAAP and adjusted basis and was able to control costs. SG&A remained stable, helping the company improve its operating and revenue margins. The result is adjusted EPS of $0.87, down just 1% and $0.03 better than expected.
The news that brought the market down is the guidance. Guidance is weak for the third quarter and full year, with revenue and earnings below consensus. However, the upshot of analyst chatter is that weakness is already priced in by the market. Margins are good and the fourth quarter expects an improvement in business conditions. The twenty-four monitored by Marketbeat rate the stock Hold and see it advancing by 17%. Post-release action includes numerous reiterated ratings, an enhanced target, and an equivalent buy initiated by Wells Fargo.
The word belongs to Cisco Systems
Institutional activity is significant. The asset balance turned bearish in Q4 2023, aligning with declining stock prices, and turned bullish again in Q1 2024. This aligns with support at a critical level and rebound potential which could happen later in the year. As it stands, institutions collectively own about 72% of this high-yielding investment and have been building their position for years.
The technical perspectives are conflicting. The stock is showing solid support around $48 and could recover soon, but a sustained rally is unlikely until the end of the year. Resistance targets near $50 and $55 will likely cap gains and keep this stock range bound until more positive news emerges. Until then, investors can rely on Cisco’s dividends and buybacks to continue building value in their portfolios.
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