Is this the quarter where shares of Cisco (CSCO) will finally prove they deserve to be traded in the realm of Microsoft (MSFT), which assumes high growth and high return, instead of trading on par with IBM (IBM) where there’s constant stagnation?
Cisco is set to report first quarter fiscal 2019 earnings results after the closing bell Wednesday. From a valuation perspective, CSCO shares, which trades at just 15 times fiscal 2019 EPS estimates of $3.00 per share, are cheap, compared to the S&P 500 index, which is priced at a forward P/E of 19. Assuming the stock was valued in similar fashion with the S&P Cisco would trade to today north of $55 per share or about 22% higher.
The stock has been rangebound, bouncing between $44 and $47 per share for quite some time as investors reconcile the degree to which Cisco, while operating in a mature routing/switching market, can continue to grow? Fairly or unfairly, these doubts exists despite the fact that the company has delivered solid earnings, while creating several mid- to long-term growth catalysts that should excite investors, including service areas such as security, the cloud, data center and analytics, which remain massive opportunities for the company.
As Cisco continues to scale back its switching and routing businesses, it has found ways to offset those decline. In the fourth quarter its infrastructure segment rose modestly at 7%, while the Applications and Security segments continue to drive the top line. On Wednesday Wall Street will want to see the extent to which progress in these areas can continue and whether Cisco — which is trading at valuations and has an upside potential of 13% — deserves multiple expansion.
In the three months that ended October, Wall Street expects Cisco to earn 72 cents per share on revenue of $12.87 billion. This compares to the year-ago quarter when earnings came to 61 cents per share on revenue of $12.14 billion. For the full year, ending July 2019, earnings are projected to rise 15.3% year over year to $3.00 per share, while full-year revenue of $51.56 billion would rise 4.6% year over year.
These growth estimates, while not breathtaking, are nonetheless trending higher. The company has also begun to show not only from stronger product sales, but also that its product gross margins has begun to improve, supporting reasons investors should give the management time to execute its stated growth objectives, especially with the company now benefiting more from high-growth/software-centric areas in has invested in.
From my perspective, Cisco still has the ability to reinvent itself and accelerate top-line growth similar to Microsoft. Synergies from acquisitions such as Broadsoft, combined with greater adoption in the subscription-based model and higher orders, Cisco stock is poised to pay off. On Wednesday investors will want to see the extent to which these positive trends can continue not only for the just-ended quarter, but also for all of fiscal 2019.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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