Topic: Value Stocks

Internet pioneer switching focus to the ‘Internet of Things’

Although it was the acknowledged pioneer in Internet routing and switching systems, this tech giant is making a big transition into faster-growing security and software markets.

The company’s strategy involves key acquisitions and high spending on research and development, with a focus on products for the “Internet of Things.” In the meantime, the shares trade at a moderate level to forecast earnings and yield 3.2%.


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CISCO SYSTEMS INC. (Nasdaq symbol CSCO; www.cisco.com) is a leading maker of hardware and software for linking and managing computer networks.

In its fiscal 2018 second quarter, ended January 27, 2018, Cisco’s earnings rose 10.0%, to $3.15 billion from $2.86 billion a year earlier. During the quarter, the company spent $4.0 billion on share repurchases; as a result, earnings per share moved up 10.5%, to $0.63 from $0.57, on fewer shares outstanding.

Those figures exclude costs to integrate recent acquisitions, one-time charges related to the new U.S. tax laws and other unusual items. On that basis, the latest earnings beat the consensus estimate of $0.59.

Revenue in the quarter improved 2.7%, to $11.89 billion from $11.58 billion. That also beat the consensus forecast of $11.82 billion.

In response to slowing demand for the company’s hardware—traditional routers and switches—Cisco continues to expand into faster-growing fields such as software for managing network security, conferencing and collaboration. In the latest quarter, recurring revenue from those subscriptions accounted for 33% of the total, up from 31% a year earlier.

Value Stocks: Dividend raised by 13.8% with April 2018 payment

The strong results also let Cisco raise its quarterly dividend by 13.8%. Starting with the April 2018 payment, investors will receive $0.33 a share instead of $0.29. The new annual rate of $1.32 yields 3.2%.

The company continues to spend a high 13% of its revenue on research. It’s particularly interested in developing products for the “Internet of Things” (the connection of devices to the Internet and each other). That network could comprise over 30 billion devices by 2020.

Cisco also uses acquisitions to spur its growth. It recently agreed to pay $1.7 billion for BroadSoft Inc. (Nasdaq symbol BFST). That firm makes software for businesses to share data, video and voice files over the Internet.

In 2017, Cisco paid $320 million for California-based Springpath Inc. Its hyper-convergence software will complement the company’s data center solutions. Cisco also paid an undisclosed sum for Perspica, a private company that uses artificial intelligence to identify computer network and database problems in order to prevent service disruptions. The company plans to merge Perspica with another acquisition, AppDynamics, which makes application and performance monitoring software.

The company’s earnings will probably rise from $2.33 a share in fiscal 2017 to $2.56 in 2018. The stock trades at a reasonable 15.6 times that forecast.

Our recommendation in Wall Street Stock Forecaster: Cisco Systems is a buy.

For our views on making the most of undervalued stocks, read What is Value Investing? And how can it boost my portfolio returns?

For our recent report on a U.S. value stock that we rate as a buy, read Successful acquisitions enhance this stock’s value.

Comments

  • Richard

    Another Tech. Recommended. What does one do when already holding MSFT and INTC? Is this the sector to have a full long term (5 yrs.) position or has it had it’s run for now? I subscribe to four newsletters of Pat’s and still feel out on my own. BNN talking heads are not always the answer with their conflicting opinions.

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