Cisco Systems Is Ready To Run Higher

Key Points

• Cisco Systems' business transformation is driving shareholder value. 
• The company issued better-than-expected guidance, and the stock is moving higher. 
• This company is a good value and pays a nice 3.15% dividend. 

Cisco Systems NASDAQ: CSCO has many attractive qualities that make it a good choice for today’s times. The company is a blue-chip tech business focused on the infrastructure of the Internet and networking. Hence, it has well-established operations and some insulation from consumer activity; it offers value and pays a nice dividend, about 3.15%.

These qualities were just affirmed by the Q2 results, which outpaced the Marketbeat.com consensus estimates and came with solid guidance. The takeaway is that Cisco Systems' business transformation from a pure play on products to a subscription-based service company is working and delivering value for shareholders. 

Cisco Systems Accelerates, Guides Higher 

Cisco Systems had an above-average quarter on many levels. Not only did the $13.6 billion in revenue grow by 7.1% versus 4.6% for the average S&P 500 company but it outpaced the consensus estimate by 141 basis points while average S&P 500 companies are underperforming. The gain was driven by a 9% increase in product revenue and a smaller 2% increase in services.

ARR increased in by 6%, driving an increase in the guidance. Product ARR drove the gain here and is up 11% on a YOY basis. Software sales were also strong, up 10%, and came with a 15% increase in subscriptions. 

"We are raising our full-year outlook driven by our growing recurring revenue base and RPO, along with our healthy backlog and the steps we have taken to improve supply. We have again increased our dividend, reflecting the strength of our cash flow generation and our commitment to shareholder returns,” said Scott Herren, CFO of Cisco. 

The company experienced margin pressure at both the gross and operating levels and on a GAAP and non-GAAP basis but none were as bad as expected. The contraction resulted in a decline in GAAP earnings of 6% but adjusted earnings rose by 5% and beat the consensus.

Perhaps more importantly, cash flow improved by nearly 100% and helped to increase the cash balance while paying a dividend, repurchasing shares and paying down some debt. 

Cisco Issues Strong Guidance, Shares Pop 

Cisco Systems' guidance for Q3 and the FY is impressive. The company essentially doubled its outlook for growth from 9% to 10% versus the consensus of 5.72%, and the earnings will also be robust. The company is now expecting adjusted EPS from $3.73 to $3.78 for the full year, which is $0.20 above consensus at the low end of the range.

The takeaway is that Cisco Systems is producing growth, better than expected growth, trades at a very reasonable 13.5X earnings, and pays a market-beating dividend yield. The yield may not stay at 3% with share prices on the move but the distribution is safe. Cisco Systems is paying only 45% of its earnings, has a strong balance sheet and is growing earnings. 

Cisco Systems' price action hit bottom in early 2022 and is now in the final stages of what could turn out to be a nice reversal. Price action is up more than 3.5% in early trading and confirming support at key levels within a Head & Shoulders Pattern. The next hurdle is the neckline at $50. If this market can get above that level, it will open the door for a more sustained rally.

The analyst consensus estimate is already above this level and moving higher so it is very likely a breakout will occur. If not, this stock could remain range-bound until other news comes out.