Communications networking giant Cisco (CSCO) is off to the races August 13 after posting a better-than-feared quarterly earnings report for the fiscal fourth period, ending July 25.
Cisco has been one of the more recent additions to both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, with shares added just above $26 each in late November after registering a 9 on the Valuentum Buying Index. The company is now trading ~$29 per share, and its chart has never looked better, with shares breaking through a multi-month healthy downtrend. To put this idea into perspective, a strong 10% share-price pop since November coupled with a growing dividend stream is quite nice in today’s “flat” market.
Cisco’s shares yield ~3%, and the company’s Dividend Cushion ratio is north of 3. That’s some nice coverage.
The fiscal fourth-quarter report showed a company exceeding consensus targets on both the top and bottom lines. Quarterly revenue of $12.8 billion, up ~4% on a year-over-year basis, is a good mark for a company that continues to navigate the fast-changing dynamics of its industry and ever-strengthening competition across various verticals. Non-GAAP earnings per share of $0.59 per share also turned some heads. Annualizing that quarterly mark puts non-GAAP earnings at nearly $2.40 per share, revealing a company that is trading at just 12 times run-rate earnings. With a balance sheet that is flush with more than $60 billion in cash and investments relative to long-term and short-term debt of $25.3 billion, its cheap valuation is a significant market mispricing.
New CEO Chuck Robbins, who has only been on the job for a few weeks, seems to have reinvigorated the company, noting that Cisco closed out the fiscal year with record revenue and record non-GAAP earnings per share. Quick to point out the strength in the company’s deferred revenue in the period, Robbins may be a better fit for the role than even long-time CEO Tom Chambers, who is credited for growing the company from just $70 million in annual revenue to its massive top-line today, expected to exceed $50 billion in fiscal 2016.
Investors are excited about the continuation of strength into the new fiscal year, with revenue expected to grow as much as 4% in the quarter ending in October, and non-GAAP earnings per share of $0.57 at the high end. We’re expecting a beat on both the top and bottom line in light of the strong growth in its recurring, subscription-based deferred revenue balance and outperformance in the most recently-reported quarter, which had been guided to a similar bottom-line range. Robbins excited investors even more, hinting that Cisco may put some of its excess cash to work in scooping up providers in the fast-growing software and security market.
As for the dividend, the continuation of an acquisition program won’t hurt the strength of the payout. For one, Cisco generated $12.6 billion in cash flow from operations in fiscal 2015 and only paid ~$4.1 billion in dividends during the year, showcasing significant room for further expansion in light of capital commitments that only total about $1.2-$1.3 billion. If you’re looking for a fantastic “moaty” business with substantial excess dividend coverage, a pristine balance sheet, and one that is significantly undervalued on the basis of future expected free cash flows, Cisco is certainly a great consideration. It’s one of our best ideas. Our fair value estimate is $36 per share.