Stock Spotlight

Cisco added to focus list

 

While Wall Street currently expects little growth from Cisco Systems ($53; CSCO), the communications equipment titan has planted itself squarely in the path of several secular growth trends. A new cycle of WiFi upgrades, the continued buildout of 5G networks, insatiable demand for bandwidth, and the increasing popularity of cloud networking all bode well for Cisco’s newer business segments.

Not that the old-fashioned equipment unit has needed much help lately. Over the last year, demand for traditional networking components such as routers, switches, and wireless connectors picked up. In fiscal 2023 ended July, Cisco posted 11% revenue growth to $57.0 billion, with the legacy networking segment posting double that growth rate.

Backlog has swelled to twice its normal size, in part because of component shortages. However, the company expects to sort out most of these problems during the October quarter. Cisco, added to the Buy List in the Aug. 28 issue, is being upgraded to the Focus List.

Business breakdown

Traditional networking components such as routers, switches, and wireless connectors account for just over half of revenue. Services, optical networking, collaboration, electronic security, and the cloud combined to contribute the remainder of revenue and should rise as a percentage of sales going forward.

In recent years, Cisco has worked to move beyond its legacy networking-hardware business, investing aggressively in security, collaboration, and cloud-based solutions. Over time Cisco’s broad business mix should drive higher, more consistent growth.

Like many other tech leaders from past decades, Cisco seemed to fall behind as networks became more dependent on services and software at the expense of hardware. However, after some false starts, Cisco has adapted to the new reality, offering a wider range of software and services.

Underappreciated

A fall-off in growth as the post pandemic boom cools off seems inevitable. However, given Cisco’s massive customer base and growing presence in high-potential markets, consensus targets of 2% to 3% sales growth and 4% to 5% profit growth in each of the next three years seem too low.

At 14 times projected year-ahead earnings, the shares trade at a 17% discount to the communications equipment industry.

Cisco has increased its dividend every year since initiating the payment in 2011, though the growth has slowed in recent years. The stock yields 2.7%.

Cisco Systems Inc., 170 W. Tasman Drive, San Jose, CA 95134, (408) 5264000, www.cisco.com.

 

 

 

 

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