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Still more upside to Cisco Systems, this investor says

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Cisco Systems (Cisco Systems Stock Quote, Chart, News, Analysts Financials NASDAQ:CSCO) is creeping towards its all-time high, but that’s no reason to shy away from the stock. That’s according to portfolio manager Lorne Steinberg, who thinks there’s likely more upside to come.

It’s been an impressive run for Cisco over the past while, where the tech giant’s share price has gone from about $35.50 in late-October 2020 to now $55.37 as of Friday’s close. That’s a gain of 56 per cent in a period of eight months. Not bad for a stock that also supports a fairly substantial dividend, currently sitting at about a 2.7 per cent yield.

“We own Cisco and we really like Cisco,” says Steinberg, president of Lorne Steinberg Wealth Management, who spoke on BNN Bloomberg on Wednesday. “They are a massive free cash flow generator and have been for years. And they keep on aggressively driving down the share count and raising the dividend substantially.”

Cisco, which has business in hardware for networking and infrastructure platforms and software applications, security and IoT products and services, has been impressing on earnings as of late.

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Ahead of the company’s fiscal fourth quarter 2021 financials due on August 18, Cisco hit $12.80 billion in revenue for its third quarter, delivered in May, with earnings of $0.83 per share. Analysts had been calling for a topline of $12.56 billion and earnings of $0.82 per share. (All figures in US dollars.)

The company said in its third quarter press release that investments made in steering business toward greater software and subscriptions have led to more recurring revenue, while overall revenue and profit have been up, a nice change of pace after a string of quarterly reports showing year-over-year drops in revene.

“Cisco had a great quarter with strong demand across the business,” said Chuck Robbins, chairman and CEO, in a press release. “We are confident in our strategy and our ability to lead the next phase of the recovery as our customers accelerate their adoption of hybrid work, digital transformation, cloud, and continued strong uptake of our subscription-based offerings.”

Steinberg said those investments should have a positive impact on Cisco’s share price going forward.

“They’re number one in the world in their major businesses and are also related to cybersecurity on a level,” Steinberg said. “But one of the big changes they’re going through, which is very positive, is they’re becoming more and more of a Software-as-a-Service, recurring revenue business, and that’s increasing margins and should drive Cisco’s stock higher.”

For the upcoming fiscal fourth, Cisco had guided for six to eight per cent growth in revenue and earnings of between $0.81 and $0.83 per share, whereas analysts had estimated 5.5 per cent topline growth and $0.85 per share in earnings.

“The good news, and this is reflected in our guidance, is that we are confident we will work through this as we have already put in place revised arrangements with several of our key suppliers,” said Robbins in the fiscal Q3 conference call. 

“We believe these actions will enable us to optimize our access to critical components including semiconductors and take care of our customers by fulfilling their demand as quickly as possible,” he said.

The company has made a number of significant acquisitions recently, including the $4.5-billion purchase of networking hardware company Acacia Communications and a $730-million acquisition of cloud communications business IMImobile.

In July, the company completed its purchase of event technology platform Socio Labs, a move which Cisco said would support its web conferencing and videoconferencing applications business Webex.

“Being able to offer novel, refreshing and inclusive experiences for all attendees – whether in person or virtual – is paramount in today’s new era of hybrid events,” said Jeetu Patel, executive vice president and general manager, Cisco Security and Collaboration, in a July 8 press release.

The post-pandemic economic recovery and continuing digital transformation across all sectors of the economy should be good for Cisco, too. JPMorgan analyst Samik Chatterjee said earlier this year that enterprise spending on information technology will benefit Cisco going forward, as there has historically been a strong correlation between enterprise IT spending trends and Cisco’s business.

Enterprise customers will “adopt the new products rather than legacy products, leading to a quicker transition of the installed base to a recurring revenue mix,” Chatterjee said. The analyst moved his rating in March from “Neutral” to “Overweight,” with a $55 target price. Also earlier this year, however, Deutsche Bank restarted coverage of Cisco with a “Hold” rating, with analyst Matthew Niknam saying although the company is sustaining healthy profitability and free cash flow generation, upside from current forecasts may be minimal.

Meanwhile, last month, Morgan Stanley nominated Cisco as one of its top ideas for the second half of the year, giving the stock an “Outperform” rating and $57 target price. 

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.

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