Cisco () reported decent fiscal third-quarter results Wednesday but its outlook sent shudders through the investment community. We don’t expect to make a material change to our fair value estimate of the firm, and we maintain our view that the shares look undervalued. However, we’re more than comfortable with our current technology exposure in both our Best Ideas portfolio and Dividend Growth portfolio at this time.
Cisco’s third-quarter net sales advanced 7% on a year-over-year basis, to $11.6 billion, while third-quarter net income jumped 11%, to $2.6 billion on a non-GAAP basis. On a reported basis, the firm’s gross margin advanced to 61.87% from 61.28% in the prior-year period, indicating some improvement but nothing to write home about. The company’s earnings per share in the quarter came in at $0.48 on a non-GAAP basis.
Looking ahead, Cisco said that it expects fourth-quarter revenue to advance between 2% and 5%, well below consensus expectations of 7%. The firm also indicated that non-GAAP earnings per share would be between $0.44 and $0.46, below consensus expectations of $0.49 per share. We view the outlook as a major negative data point for the networking arena.
Despite the poor outlook, Cisco remains a veritable cash cow, pulling in roughly $3 billion in operating cash during its third quarter. Plus, the company has over $48 billion in cash just sitting on the books. Still, while this gives the company tremendous operating flexibility and a fortress balance sheet, we’d need the company’s fundamentals and technicals to turn the corner for us to get interested in the stock. We remain on the sidelines despite the firm’s attractive valuation, as indicated by the company’s Valuentum Buying Index rating of 6.