Cisco Systems, Inc. (CSCO) manufactures and sells Internet Protocol-based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China. The company serves businesses of various sizes, governments, public institutions, and service providers.

CSCO had a strong end to fiscal 2022, thanks to its solid fourth-quarter performance. “Full-year product orders and backlog are both at record highs and reflect the strong demand we continue to see for our innovation and the overall value we bring to our customers as they accelerate their digital transformation,” said Chuck Robbins, CSCO’s Chair and CEO.

For the fourth quarter, the company reported better-than-expected revenue of $13.10 billion, driven by solid execution and various initiatives to reduce supply chain pressures. Also, with its progress on business model transformation, total Annualized Recurring Revenue (ARR) stood at $22.90 billion, up 8% year-over-year.

Furthermore, CSCO’s operational discipline is reflected in its healthy operating margin and strong cash flow generation, allowing the company to return about $4 billion to stockholders in the fourth quarter through share buybacks and dividends. On August 24, CSCO’s Board of Directors declared a quarterly cash dividend of $0.38 per share, to be paid on October 26.

CSCO pays $1.52 as dividends annually, yielding 3.84% on the current price. Its 4-year average dividend yield is 2.96%. Its dividend payouts have increased at a CAGR of 3.1% over the past three years and 6% over the past five years. Moreover, the company’s dividend has grown for 11 consecutive years.

The company also provided impressive guidance for the fiscal 2023 first quarter and full-year 2023. For the first quarter, CSCO expects revenue growth between 2% and 4% and non-GAAP EPS between $0.82 and $0.84. For fiscal 2023, the company expects revenue growth to come between 4% and 6% and earnings between $3.49 and $3.56 per share.

Shares of CSCO have declined 15.6% in price over the past month to close the last trading session at $39.27. However, Wall Street analysts expect the stock to hit $54.00 in the near term, indicating a potential upside of 37.5%.

Here is what could influence CSCO’s performance in the upcoming months:

Robust Financials

CSCO’s revenue increased 3.5% year-over-year to $51.55 billion in the fiscal year 2022 ended July 31, 2022. The company’s non-GAAP net income increased 3.3% year-over-year to $14.09 billion. Also, its non-GAAP EPS came in at $3.36, representing an increase of 4.3% year-over-year.

Favorable Analyst Estimates

Analysts expect CSCO’s revenue for the fiscal 2023 first quarter (ending October 2022) to come in at $13.27 billion, representing an increase of 2.8% year-over-year. The current quarter’s $0.84 consensus EPS estimate indicates a 1.8% year-over-year increase. The company has surpassed the consensus EPS estimates in each of the trailing four quarters.

In addition, the consensus revenue and EPS estimates of $54.01 billion and $3.52 for the current fiscal year (ending July 2023) represent improvements of 4.8% and 4.9% year-over-year, respectively. The company’s revenue and EPS for the next year are expected to increase 4.1% and 8% year-over-year to $56.21 billion and $3.81, respectively.

High Profitability

CSCO’s trailing-12-month gross profit margin of 62.55% is 24.2% higher than the 50.35% industry average. Its trailing-12-month EBITDA margin of 30.84% is 151.4% higher than the 12.27% industry average. Likewise, the stock’s trailing-12-month net income margin of 22.91% compares to the industry average of 4.08%.

Furthermore, CSCO’s trailing-12-month levered FCF margin of 18.95% is 138.6% higher than the industry average of 7.94%. The stock’s trailing-12-month ROCE, ROTC, and ROTA of 29.15%, 16.81%, and 12.57% are higher than the industry averages of 6.63%, 3.94%, and 2.47%, respectively.

Discounted Valuation

In terms of forward non-GAAP P/E, CSCO’s 11.15x is 32% lower than the industry average of 16.39x. The stock’s 7.84x forward EV/EBITDA is 21.3% lower than the 12.29x industry average. Moreover, its forward EV/EBIT multiple of 8.60 compares with the industry average of 14.25.

In addition, CSCO’s 9.77x forward Price/Cash Flow is 36.9% lower than the 15.5x industry average.

POWR Ratings Show Promise

CSCO has an overall B rating, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

CSCO has a grade of A for Quality, consistent with its higher-than-industry profitability metrics.

CSCO is ranked #7 out of 49 stocks in the Technology-Communication/Networking industry.

Beyond what I have stated above, we have also given CSCO grades for Growth, Sentiment, Momentum, Value, and Stability. Get access to all CSCO ratings here.

Bottom Line

CSCO’s net income and EPS have increased at CAGRs of 4.2% and 8.2% over the past five years, respectively. Moreover, the company provided promising fiscal 2023 guidance. Its near-term prospects look bright because of strong demand for its products and services amid easing supply chain pressures.

Given CSCO’s attractive dividends and high profitability, we think it could be wise to invest in the stock now.

How Does Cisco Systems, Inc. (CSCO) Stack Up Against its Peers?

CSCO has an overall POWR Rating of B. One could also check out these other stocks within the Technology-Communication/Networking industry with an A (Strong Buy) rating: Viavi Solutions Inc. (VIAV), Extreme Networks, Inc. (EXTR), and AudioCodes Ltd. (AUDC).

CSCO shares rose $0.32 (+0.81%) in premarket trading Thursday. Year-to-date, CSCO has declined -36.09%, versus a -24.06% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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