Cisco Earnings Preview: Slowing Sales May Hurt, But Long-Term Potential Is Intact
Investing.com | Nov 12, 2019 08:00
* Reports Q1 2020 results on Wednesday, Nov. 13, after the close
* Revenue expectation: $13.07 billion
* EPS expectation: $0.81
Having warned that the global slowdown is starting to hit its business, Cisco Systems Inc (NASDAQ:CSCO) has successfully set a low bar for its fiscal 2020, first-quarter earnings report that’s scheduled to be released on Wednesday.
The world's biggest maker of routers, switches and other gear that companies use to connect computers is forecast to make $13.07 billion in sales for the period that ended in September, a flat performance when compared to the same period a year ago. Profit, however, is expected to rise to $0.81 a share from $0.75, according to analysts’ consensus forecast.
The ongoing trade dispute between the U.S. and China, coupled with a cautious approach by the company’s largest customers amid a slowing global economy, are some of the headwinds that are prompting companies to either put a brake on their orders, or reduce their purchases of Cisco products.
These products are considered the backbone of the internet economy, making it an economic bellwether offering visibility on global demand and the future outlook that's hard for investors to ignore.
In the last quarterly report, Cisco reported that emerging markets bookings were down and the Asia-Pacific region posted a decline of 8%. While Cisco gets less than 3% of its revenue from China, business there has dropped “dramatically,” according to the company. Chinese state-owned enterprises and some telecom providers that used to use small amounts of Cisco machinery have moved to the sidelines due to the current trade tension.
These negative developments have hit Cisco shares hard: they dropped 17% since reaching a multi-year high of $58.26 in July, closing yesterday at $48.10. But despite these headwinds, we still believe Cisco stock is a good value play for long-term investors and could be a bet worth taking.
h2 A Solid Global Player/h2We derive our optimism from the company’s solid global position as a network-equipment supplier. While the cyclical nature of this segment of the hardware market could continue to put a drag on Cisco’s stock performance, it’s hard for companies to delay their investments indefinitely for products that are so crucial for their tech infrastructure.
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Another reason we're fairly bullish about Cisco is the company’s aggressive diversification drive away from hardware to a software driven model within new high-growth areas of the market, such as cybersecurity and applications.
Under Chief Executive Officer, Chuck Robbins, Cisco has made a string of acquisitions to build a software and services business. In August, it announced plans to buy closely held Voicea, a maker of software that provides real-time transcription and voice search capabilities. In July, it agreed to acquire Acacia Communications Inc (NASDAQ:ACIA) for about $2.6 billion, gaining chips and machines that help translate optical signals into electronic data.
These growth initiatives, coupled with the company’s dominant position in the America region in which its generates the majority of its sales, have positioned the company to outperform when the macroeconomic risks reduce. In addition to growth, Cisco is also a reliable company that pays regular dividends, making it an attractive option for those seeking to earn a growing income.
With its current annual yield touching about 3%, investors are getting $0.35 a share payout, which has risen 14.20% per year during the past five years.
Bottom Line
Cisco is a company which is set to deliver strong growth as it benefits from a good mix of recurring revenue from its legacy business and its focus on the new high-margin areas. We believe any post-earning weakness on Wednesday should be taken as an opportunity to buy this quality stock.
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