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John Engle
John Engle
Articles (206) 

Cisco Systems: A Safe-Haven Stock?

A decent wealth preservation play with upside

December 05, 2018 | About:

The networking market is booming. Global traffic is forecast to grow by more than 20% a year, with some more niche markets set for even greater growth. Between the internet of things, the switch to 5G and growth of cloud computing, this sector is certainly an attractive one for investors who are bullish on connectivity.

Cisco Systems Inc. (NASDAQ:CSCO) is a San Jose, California-based multinational technology conglomerate that develops, manufactures and sells networking hardware, telecommunications equipment and software. Its devices are primarily integrated by Cisco IOS Software and include routers, switches and other connectivity devices. Since its founding in 1984, Cisco has acquired numerous subsidiary companies, including OpenDNS, WebEx, Jabber and Jasper, which has allowed the tech giant to gain exposure to a number of specialized areas such as IoT, domain security and energy management.

Topline data

The company recently posted earnings for the first quarter of its 2019 fiscal year. Revenue came in at $13.1 billion year over year, an 8% increase. Total product sales were up 9% year over year. Service revenue grew 3% and product orders grew 8%. Adjusted earnings per share came in at 75 cents, beating expectations by 3 cents and representing 23% growth year over year. Management has provided second-quarter guidance for revenue to grow in the range of 5% to 7%. Non-GAAP earnings per share for the next quarter are expected to range between 71 cents and 73 cents.

Successes and challenges

The best way to evaluate Cisco’s prospects is to look at the company’s component businesses. Infrastructure Platforms, by far the largest business, increased revenue by 9% for the quarter. A major factor in this growth has been the sales of the Catalyst 9000 family of switches. The newest additions to this family are the Catalyst 9200, which extends intent-based networking to entry-level customers, and the Catalyst 9800, a wireless controller that can be used for enhanced security automation and analytics. The Cat9k family is still early in its upgrade cycle, meaning that Cisco will be able to ride sales of the switches for at least a few years going forward.

In line with the macro trend of digital transformation, Cisco has launched the Nexus 400G switch, which increases bandwidth and scale for businesses transitioning to the cloud. This has driven sales in the company’s data center segment. Routing was returned to growth due to revenues from service providers.

The Applications business grew topline revenue by 18%, with good growth across the board. Unified Communications, TelePresence and newly-acquired AppDynamics did particularly well. The Security business grew revenue by 11%, demonstrating that recently-purchased Duo Security (which provides cloud-based identity solutions for unified access security and multi factor authentications) is well on its way to being fully integrated into the parent company.

That said, Cisco is not the only denizen of the booming networking market. Chinese giants Huawei and ZTE present a serious challenge to Cisco in emerging markets. And upstart newcomers like Extreme Networks (NASDAQ:EXTR) and Arista Networks (NYSE:ANET) can boast tremendous triple-digit revenue growth, making those companies much more attractive growth plays that Cisco.

Verdict

Overall, Cisco presents an opportunity for investors who are looking for a safe play in an expanding industry. While it may not have the breakneck growth rates of some of its smaller competitors, it does look like it has avoided some of the pitfalls that often bedevil mature companies in fast-moving sectors. Moreover, Cisco has the benefit of having a whole suite of products and services, from cloud connectivity to data center security. Buying the stock probably won’t make you rich overnight, but it is a good way to preserve wealth and has the potential for gradual upside.

(This article was co-authored by Stepan Lavrouk, director of research at Atreides Capital LLC and a former research analyst for Almington Capital Merchant Bankers.)

Disclosure: No positions.

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About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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