Cisco: Still marching to its own beat

The networking giant is leaving no stone unturned to find growth opportunities, regardless of cost.

By TheStreet Staff Dec 11, 2012 12:52PM

Technician working on a network server copyright Purestock, Purestock, Getty Imagesstreet logo

By Richard Saintvilus

 

Although it is not reflected in its stock price, networking giant Cisco (CSCO) continues to make Wall Street doubters look incredibly foolish.

 

With the stock resting at $19 and Cisco sitting on $45 billion in cash, it won't be long before the company starts putting its money where its mouth is -- particularly since Cisco has been hinting about more acquisitions. But for investors, will it be too late to capitalize? With Cisco's recent earnings performance, this is a question worth asking.

 

Software is the new hardware

Cisco started its fiscal 2013 just as it ended 2012, with another earnings beat. The network giant reported net income of $2.6 billion, or 48 cents per share on revenue of $11.9 billion. Not only was this enough to beat analysts' estimates of 46 cents per share, but the results also represented 11% profit growth. Likewise, revenue also grew by 6% and exceeded street expectations of $11.77 billion.

 

Cisco continues to see excellent improvement in its services business with revenue growing year-over-year by 12%. Some of the company's largest customers have contributed to the growing demand as evident by the 9% increase in orders. On the other hand Europe continues to be a challenge. Likewise, Cisco's routing and switching business continues to underperform. So what does it do?

 

Cisco has provided an answer to its hardware weakness by opening its wallet. The company's recent shopping spree includes spending $1.2 billion for Meraki and most recently $141 million in cash for Cariden -- both within the past two weeks.

 

This brings Cisco's software acquisitions total to nine. Essentially, Cisco is looking to leverage its strong services business, which grew by 12% with more cloud-based purchases. The question is, will it be enough to offset its lagging hardware business. But more importantly, it may not even matter.

 

Once enterprises start migrating fully into the cloud, software will become "the new hardware." That Cisco has been investing heavily in this direction is not a surprise -- particularly since that market is projected to grow to $177 billion by 2015. In the meantime, the company is looking for any type of competitive advantage. Still, Cisco doesn't think that it has done enough.

 

Moving forward

Cisco expects second-quarter earnings between 47 cents a share and 48 cents per share. The company also expects revenue to grow as high as 5.5% if it reaches the high end of its range of $12.1 billion. As has been the pattern for most of the year, the company has chosen to guide conservatively.

 

On the other hand, Cisco now has a streak of seven consecutive quarters where it beat earnings forecasts. Q2 won't be any different -- particularly since the market is expecting a rebound in enterprise spending, which has prompted analysts to upgrade the stock to $25, as reported by Forbes.

 

Likewise, Cisco's management deserves more credit than they have received. Although the company has gotten more than its share of criticism for its inability to grow, management continues to ignore all of the noise and has focused solely on execution.

 

As such, it should be viewed as an encouraging sign that the company is willing to leave no stone unturned to find growth opportunities -- regardless of how much it costs. Investors would be wise to add shares at current levels as the stock has a good opportunity to trade in the $25 to $30 range during the next 12 months.

 

At the time of publication the author held no positions in any of the stocks mentioned.

 

 

More from TheStreet.com

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

129
129 rated 1
281
281 rated 2
444
444 rated 3
732
732 rated 4
629
629 rated 5
623
623 rated 6
610
610 rated 7
440
440 rated 8
303
303 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
VZVERIZON COMMUNICATIONS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.