CISCO SYSTEMS INC. (Nasdaq symbol CSCO; www.cisco.com) is a leading maker of hardware and software that links and manages computer networks. The company’s hardware includes routers, local area network (LAN) and asynchronous transfer mode (ATM) switches, and server computers. Cisco mainly sells this equipment to large businesses and government agencies. The company continues to profit as wireless carriers upgrade their networks to handle rising demand for video and other media. Cisco is also benefiting from a major restructuring plan, which included selling its low-margin consumer products businesses and focusing on more profitable operations, like software. Cisco’s revenue rose 34.6%, from $36.1 billion in 2009 to $48.6 billion in 2013 (fiscal years end July 31). Earnings jumped 77.1%, from $6.1 billion to $10.9 billion. Due to fewer shares outstanding, earnings per share rose at a faster pace of 92.4%, from $1.05 to $2.02. The company continues to invest heavily in new technologies. In 2013, it spent $5.9 billion, (or 12.2% of its revenue) on research. That’s up 8.3% from $5.5 billion (or 11.9% of revenue) in 2012. Cisco aims to use this spending to develop new products to stay ahead of its competitors. For example, its new nPower chip can process 400 gigabits of data per second, compared to 140 gigabits for its older model. This new chip will help network operators cope with rising data traffic, particularly as more mobile devices automatically transmit messages and other data in response to certain events.
Tech stocks: Slowing sales in developing markets bring down share price and prompt job cuts
Cisco is also adding to its expertise by purchasing smaller companies. Recently, it agreed to pay $415 million for privately held Whiptail. This firm specializes in solid state memory drives, which use flash chips instead of magnetic discs. Because they have no moving parts, solid state drives use less power and transfer data quicker than regular drives. The stock moved down recently after slowing sales in China and other developing markets prompted Cisco to cut its revenue forecast for the current quarter. (Overseas markets supply 40% of its overall revenue.) In response, the company now plans to cut 5% of its workforce. Cisco expects severance and other costs to total $550 million. The company’s $0.68 dividend currently yields 2.8%. In the latest edition of Wall Street Stock Forecaster, we examine Cisco’s earnings outlook in light of its restructuring measures. We also look at whether its research spending and customer base can keep it ahead of the competition and help the shares rebound. We conclude with our clear buy-hold-sell advice on the stock. (Note: If you are a current subscriber to Wall Street Stock Forecaster, please click here to view Pat’s recommendation. Be sure to log in first.) COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members Cisco has a relatively long history as a leader in its field, yet a number of seemingly dominant tech stocks have faltered. What advantages do you look for in a tech stock when you are thinking of buying it? Are there specific signs you look for that may indicate that a tech stock is in trouble?
