Cisco Systems Inc. (CSCO, Financial) continues inching upward at a healthy rate. The stock ended 2016 in the green and is up nearly 20% year to date. Despite slowing core business, the company has successfully managed to hold itself and is aggressively trying to find its way back to revenue growth.
The networking hardware provider posted its first quarter results on Nov. 15. In the first quarter, the company shared earnings per share of 61 cents, exceeding analysts' estimates by one cent. On the other side, its revenue came in at $12.1 billion, $30 million better than the consensus.
Despite beating analysts' estimates, that figure represents a drop of 1.7% year over year. Moreover, the first quarter marked the eighth consecutive quarter in which it reported negative revenue growth. The company, however, guided for a return to revenue growth in the upcoming quarter.
Cisco is still on its way in its transition to subscription products, which in turn is negatively impacting revenue. But it anticipates overcoming that headwind and ending its long-term streak of top-line declines.
The company also said that it has successfully acquired Springpath Inc., a leader in hyper-convergence software, for $320 million. The acquisition will help the company to deliver more software-centric solutions. It completed another acquisition, Perspica that will enable clients to further benefit from machine learning capabilities to examine massive amounts of app-related data.
Cisco recently announced that it plans to acquire BroadSoft, a communication software and service provider, for $1.9 billion. Many investors were disheartened when the company announced this deal, but it looks like a smart move because it will further diversify away from its deteriorating core hardware business.
The deal to acquire BroadSoft would be the company’s second major acquisition in 2017, succeeding the $3.7 billion acquisition of AppDynamics.
Another thing to notice in the case of Cisco Systems is its attractive dividend yield of 3.23%. Furthermore, the company will likely increase its dividend in February 2018. Despite offering a robust dividend yield, the company’s payout ratio currently sits at 58%, implying it still has enough room to grow its dividend in the coming years.
The networking hardware company carries on producing high levels of free cash flows. The company’s total cash, cash equivalents and investments amounted to $71.5 billion; a surge of $1 billion compared to fourth quarter fiscal year 2017. It has managed to improve its free cash flow in spite of flat revenue over the past several years, which is highly impressive.
Summing Up
Although Cisco has been facing several problems over the past few years primarily due to the slowdown in its core business, it still has managed to remain in green this year and currently trades at a level not seen for more than a decade.
Cisco Systems continues acquiring smaller players, especially software-based companies, which shows that the company is putting in a lot of effort to grow its software business.
The stock currently trades at a price-earnings (P/E) ratio of almost 19, which is comparatively less than the industry’s average. This suggests that it is undervalued and its transition to recurring revenue model will bear fruit in the future. However, shareholders should not expect a fiery growth in the near term, but It will likely generate healthy returns over the coming few years.
Disclosure: No positions in the stock mentioned in this article.
