Cisco Systems is my Top Pick, says Lorne Steinberg

As tech stocks continue to get hammered investors are seemingly fleeing the sector in droves, but there are good reasons to be sticking around for a company like Cisco Systems (Cisco Systems Stock Quote, Charts, News, Analysts, Financials NASDAQ:CSCO), says portfolio manager Lorne Steinberg, who has the American tech giant as one of his best ideas for the 12 months ahead.

“Cisco is the largest networking company in the world and over the last few years they’ve been shifting their business to software and services, which is higher margin,” said Steinberg, president of Lorne Steinberg Wealth Management, who spoke on BNN Bloomberg on Wednesday where he named Cisco as a Top Pick.

“Cisco has been a great allocator of capital over the years. 20 years ago, they had seven billion shares outstanding and today they have a little over four billion shares outstanding,” he said.

Cisco Systems had a nice run last year when the stock returned 40 per cent, which came on top of a dividend currently sporting a three per cent yield, making it one of the most attractive in a tech sector not known for substantial dividends. 

But this year has been less rosy for CSCO, which is down about 24 per cent amid a market that has soured on tech in general. The NASDAQ Index, for example, is now off by 28 per cent year-to-date compared to the broader S&P 500 which is down by 18 per cent, making for a depressing time to be owning equities but one in which a savvy investor could do well by buying the right companies.

Ahead of Cisco’s third quarter fiscal 2022 financials for the period ended April 30 which are due next Wednesday, May 18, the company last reported earnings in February where its fiscal Q2 featured revenue up six per cent year-over-year to $12.70 billion and adjusted EPS up six per cent to $0.84 per share. Both were slight beats of analysts’ estimates at $12.65 billion and $0.81 per share, respectively.

“We continue to see incredibly strong demand across our portfolio, emphasizing the criticality and relevance of Cisco’s innovation,” said Chuck Robbins, chair and CEO of Cisco, in a press release. “Our robust order strength, record backlog and double-digit growth in annual recurring revenue position us well to deliver growth.”

The company finished the Q2 with $21.1 billion in cash and equivalents compared to $24.5 billion at the end of the previous quarter, while it returned $6.4 billion to shareholders over the quarter through share buybacks and dividends. 

“We delivered healthy margins while continuing to make good progress in our business model shift, with software product revenue growing nine per cent year-over-year and the product portions of ARR and RPO growing in double digits,” said Scott Herren, CFO, in a press release. “The combination of our dividend increase and additional share repurchase authorization demonstrates our commitment to returning excess capital to our shareholders and confidence in our ongoing cash flows.”

For the upcoming Q3, Cisco is calling for three to five per cent year-over-year revenue growth and non-GAAP EPS to hit between $0.85 and $0.87 per share.

Steinberg says investors buying today will be picking up CSCO at an attractive price.

“They’ve had lacklustre growth but growth is starting to accelerate. And you have a chance to buy a world leader trading at 14x earnings, a three per cent dividend with annual dividend growth, the share buybacks and finally some top line growth. So, it’s really a compellingly cheap, wonderful business,” Steinberg said.

Last week, Cisco spoke about its work on predictive technologies to help propel its networking capabilities. Calling it the future of connectivity, the company said it’s been working the past two years on a predictive analytics engine to help IT teams prevent issues and improve customer experience. Cisco said managing disruptions to a company’s network is becoming more challenging with mounting cybersecurity threats and hybrid work environments, making predictive analytics all the more crucial.

“For the last 30 years, Cisco has been powering the internet, keeping the world connected to what matters most,” the company said in a press release. “Networks have evolved to detect and react to issues to maintain performance and reliability. The next logical step is for networks to predict problems before they happen, something that has been difficult until now.”