Image Source: Cisco Systems
Positive momentum in simulated newsletter portfolio idea Cisco’s business transformation continued in its fiscal 2018 fourth quarter as the company turned in the highest quarterly revenue in its history and growth accelerated yet again. We’ve raised our fair value estimate for shares.
By Kris Rosemann
Simulated newsletter portfolio idea Cisco (CSCO) continues to make progress in its business transformation, and its fiscal 2018 fourth quarter report, released August 15, revealed another quarter of positive top-line momentum as total revenue grew 6% from the year-ago period to a quarterly company record of $12.8 billion. Highlighting the progress of the business transition in the quarter was a 1 percentage point increase in recurring revenue as a percentage of total revenue (now at 32%), deferred product revenue from recurring software and subscriptions leaping 23%, and subscriptions as a percentage of software revenue climbing 5 percentage points to 56%.
Cisco’s gross margin in the quarter faced some pressure due in part to specific deals in its APJC region and negative product mix, and its operating margin contracted as well, which resulted in non-GAAP operating income growing 4% on a year-over-year basis. Non-GAAP net income in the fiscal fourth quarter grew 8% from the year-ago period, but a number of moving parts related to the new tax law helped push cash flow from operations down ~1.5% to $13.7 billion for the full year. Slightly lower capital spending in the full fiscal year kept free cash flow roughly flat compared to fiscal 2017 at just over $12.8 billion, which was more than enough in covering cash dividends paid in the quarter of less than $6 billion.
As of the end of its fiscal year 2018, Cisco held a net cash position of $21 billion, and we would be much more concerned about the company’s decision to repurchase more than $17.5 billion worth of stock in fiscal 2018 if we hadn’t held a relatively favorable opinion regarding its valuation for a large portion of the period. Nevertheless, Cisco continues to be among our favorite dividend growth ideas on the market today, and its Dividend Cushion ratio currently sits at 3, which incorporates a continuation of its recent annual dividend growth trend of ~10%. The combination of a ~2.9% yield and an unadjusted Dividend Cushion ratio of 3 is quite rare across our coverage universe.
Following its fiscal fourth quarter report, we’ve raised our fair value estimate for Cisco to $54 a share as a result of higher near-term expectations, which were driven in part by the positive momentum revealed in its earnings report, as well as a reduction in our cost of capital assumption. We plan to continue highlighting this idea in both simulated newsletter portfolios as its business transformation continues to gain steam and shares begin to show the potential for a meaningful move towards our fair value estimate.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.