Cisco Acquires 3 New Businesses in October

Cisco's acquisitions will significantly add value for shareholders

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Nov 03, 2015
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In the last week of October, Cisco (CSCO, Financial) announced three acquisitions that will significantly add to its value in Security, Service and Video.

In 2015, Cisco reported $1.75 billion in revenue from Security, a gain of 12% from the prior year. On Oct. 27, Cisco announced it would be acquiring Lancope, Inc., a privately held company for which Cisco intends to pay $452.5 million. Closing in the second quarter of 2016, Lancope will build the capabilities that Cisco provides through its Security division. Lancope is a premier provider of cyber security solutions with analytic and security intelligence capabilities that can detect attacks and vulnerabilities through filtration deep into a company’s data network providing for advanced prevention.

On Oct. 26, Cisco also announced its intention to acquire ParStream. ParStream will expand on Cisco’s services for the Internet of Things. It brings an analytics database to Cisco which will allow the company to more efficiently analyze and provide solutions for data gathered through connected Internet of Things devices. The speed at which data can be captured and analyzed will be a significant strength for Cisco as ParStream provides for real time data capture and analysis. ParStream will contribute to revenue in Cisco’s Service business which accounted for 23% of revenue in fiscal year 2015. The Service business provides numerous software offerings. In 2015 it grew revenue to $11.4 billion, a gain of 4% from 2014.

The acquisition of ParStream will help Cisco to keep pace with its Dow 30 technology competitors which have also taken large strides in IoT innovation. In October IBM (IBM, Financial) announced its acquisition of The Weather Company which will form the base for its newly created IoT business unit. Intel (INTC, Financial) has also been moving in the IoT market, building on its 2014 commitment to broadening its capabilities and offerings for IoT the firm announced in June 2015 that it would be acquiring Altera (ALTR, Financial).

Cisco, too, has been investing heavily in its IoT business. In June it announced a new six-pillar IoT system that would enhance IoT data analysis for companies with connected IoT devices. The firm’s June announcement also included 15 new products targeted for the IoT.

On Oct. 28, Cisco also announced it will be acquiring 1 Mainstream. A Cloud-based video service provider, 1 Mainstream will add to the firm’s Service Provider Video segment. The Service Provider Video segment struggled in 2015, posting revenue growth of -7% and -10% in the fourth quarter and fiscal year, respectively. The acquisition of 1 Mainstream will bring expanded digital content and video streaming capabilities to Cisco. It will also complement Cisco’s current Infinite solutions offering which is focused on video entertainment solutions transmitted in the Cloud.

Added revenue from the three acquisitions for Cisco will begin to be realized in the second half of 2016 adding significantly to revenue across all of the firm’s business units and specifically to Security, Service and Video. For investors, the closing of the three acquisitions in the second quarter of 2016 should only help to further momentum for an already steadily growing business with significant near-term upside potential.

In 2015, Cisco saw total revenue growth of 4.3% with net income growth of 14.4% and earnings per share growth of 17.4%. Given the recent acquisitions and synergies created from the integrated businesses, Cisco is expected to continue growing total firm revenue and earnings robustly with high-end estimates for revenue and earnings per share showing growth of 7% and 10%, respectively, in 2016.

In the current market environment Cisco is outpacing its closest comparable competitors, IBM and Intel, on a number of fronts. In market trading year-to-date the firm’s stock is up 6.67% versus -4.71% for Intel and -10.38% for IBM. Over the past three years, Cisco has been steadily growing revenue, outpacing revenue growth of Intel and IBM. For the previous three-year period Cisco has posted revenue growth of 2.19% versus 1.14% for Intel and -4.61% for IBM. The firm’s superior revenue growth has also resulted in free cash flow to revenue outperformance. For the five-year period Cisco reports a FCF to revenue percentage of 22.75% versus 19.15% for Intel and 14.1% for IBM.

In technology equipment Cisco has also been a leader in operating efficiency which should continue to improve through 2016 as synergies are realized from acquisitions. For the five-year period, Cisco’s gross margin nearly matches that of Intel at 61% versus 63%, respectively. It also outperforms IBM with a five year gross margin of 48%.

These solid numbers combined with added revenue from Lancope, ParStream and 1 Mainstream in 2016 as well as a forward dividend yield of 2.91% indicate that Cisco has substantial room for upside price appreciation. For investors the firm’s current momentum makes now an opportune time to buy Cisco, showing price appreciation potential of 29% in the near-term with a discounted cash flow value of $40.43 versus its market trading price of $28.72.

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