Now Is The Time To Buy Cisco Systems, Inc (NASDAQ:CSCO)

Cisco Systems Gives A Disappointing Report, Not

Cisco Systems (NASDAQ:CSCO) reported its 4th quarter 2020 earnings and blew past the consensus. The strength in numbers wasn’t all that surprising, as an Internet and communications infrastructure company it is uniquely poised to benefit from COVID-19 related trends. Not only did the company beat on all metrics, but it also has accomplished its most recent objective; shifting from a pure-play infrastructure company to a diversified technology and services company. Now Cisco can sell its products, the software to operate them, and the services to keep them going. That’s why I’m surprised execs gave such weak guidance.

Before I go on let me outline just what it is Cisco does. The core business is IP networking infrastructure platforms for the information and IT industry. This includes switching, routing, wireless, and datacenters. Along with this Cisco sells software targeted for the IoT and big data analytics industries, security products including cloud services, and services and support for its many products. In a world where the shift to technology has been accelerated by the COVID-19 pandemic, Cisco and its products are indispensable.

Cisco Systems Business Is Healthy, And The Stock Is Cheap

Cisco Systems delivered a decent report for the 4th quarter of the year. Although revenue fell -9.5% for the quarter it beat consensus by nearly 50 basis points and strength carried through to the bottom line. Adjusted EPS beat by more than 5%, gap by closer to 2%, putting the full-year tally just above the consensus. Security was a notable bright spot, increasing by 10% over the last year, but weakness in the core business more than offset those gains.

Infrastructure platform revenue, hindered by the pandemic, fell double-digits but I warn you. Don’t expect that weakness to last. When it comes to networking infrastructure, the pandemic may have slowed business but, in the long-run, that business will come back and more. Those that already have an IT infrastructure are going to need upgrades and those that don’t are going to have to get one or else watch business fade away to nothingness.

"We executed well in Q4, delivering strong margins despite the very challenging environment," says CFO Kelly Kramer. "Software subscriptions now make up 78% of our software revenue and remaining performance obligations continued to grow strongly in the quarter, reflecting the strength of our portfolio of software and services."

Regarding guidance, the company is forecasting a revenue decline of -9.0% t0 -11.0% in the 4th quarter. While less than expected, it was the EPS forecast that really got the stock moving this morning. EPS is expected in a range of $0.41 to $0.47 compared to the consensus of $0.75% which, in my opinion, is a low-ball estimate the company will likely beat with ease. Regardless, even when adjusting for the new guidance, the stock is only trading about 15X its forward earnings and a bargain versus its lower-yielding peers within the broad market.

Cisco Systems Pays A Healthy 3.0% Dividend

Cisco Systems pays a nice, healthy distribution that yields over 3.0% with today’s sell-off. The payout ratio is low and below 50% which sets it up for future increases as cash flow allows. The company has been raising its dividend for 9 consecutive years so there is some expectation it will do so again during the January reporting cycle. The balance sheet is a thing of beauty, there is no reason to fear the dividend will be cut because cash balances are high, debt is very low, coverage is ample, and cash-flow is largely unhindered.

The Technical Outlook: Cisco Systems Is A Tech Winner, And Trading At A Discount

Shares of Cisco Systems were on the verge of a breakout before the guidance was given. Now, the shares are down about 6.0% and offering a sweet entry point for value-minded income investors. The pre-market action has shares trading just below the $45 mark and just above a key support level. Support is near the bottom of the near-term trading range and is a likely price point from which another rally can build. If price action does not maintain support at the $45 level a deeper move, possibly to the $42 or $40, is likely. In that case, I would still be a buyer.