It was that time again, the Cisco disco. The company released results for the first quarter of their financial year, and judging by what the stock is doing afterhours, let us just say that the market enjoyed them. A lot of people struggle to understand this company, I figured that I was always going to do a worse job than Google finance in trying to describe the company, so here is a copy paste, right up the alley of a former police chief here locally. You know, the fellow that had a remarkable resemblance to Morgan Freeman.
"Cisco Systems, Inc. designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. Its products are installed at enterprise businesses, public institutions, telecommunications companies, commercial businesses, and personal residences."
If you want to think about the internet as a river, or better, a set of canals providing the information, then Cisco are the people who build sluice gates, the people who make sure that the water flows fast and in the right direction. Routers, switches, wireless systems, storage facilities, the cloud, call centres, even fancy IP phones. Those Cisco phones rock. So, everything to do with the internet. So, if you think that the internet is a growth business, just in general, then Cisco would be well positioned to benefit from the continued expansion and digitalisation of the world. Heck, your fridge is even going to have an IP address. IPv6 people. The whole idea is that you would be able to control your house from a smart device, turn on lights, get your fridge to relay to you that you are running short of stuff (milk, veggies) that ordinarily you would only discover later. The future is here already, perhaps some people find that a little invasive, a talking fridge. Perhaps it comes with a scale and can tell you to "step away from the fridge people" when it is just you alone. No more midnight snacking.
Cisco released the numbers post market, the top line number came in slightly higher than anticipated 11.876 billion Dollars for the quarter, led by a strong bounce in their core business in the America's. Still, this only represents a 6 percent increase from the corresponding quarter. But hey, I will take that especially when they say in the documents that went alongside the
Q1 Fiscal Year 2013 Conference Call, that it is
"a very challenging market, where many of our peers are reporting declines." Good one. Gross margins ticked up, which was another sign that the hard work the management team has done with streamlining the business, simplifying the business has started to pay off.
When you dig a little deeper into the revenue numbers you find that the new businesses have rocketed. I was very pleased to see a 30 percent growth in their Service Provider Video Business. Their wireless business grew by 38 percent and their data centre business exploded, up 61 percent. Collectively however, if you add those three businesses together they are still less than 20 percent of their overall sales, almost equal to their routing business, which saw sales contract a little. Even their core switching business showed negative sales growth of 2 percent. Pleasingly their services business grew 12 percent, this is the second biggest segment representing 22 percent of total revenue. So this is a case of the older businesses contributing less and the newer business starting to grow strongly.
The company bought back 15 million shares at an average price of 16.44 USD per share, but more exciting for shareholders was the big bump up in the dividend to 14 cents a quarter. That translates to 56 cents per year, which at an afterhours much higher share price of 18.12 that represents a yield of 3 percent before tax. This is a company that only paid their first dividend in March of 2011, that is better than "not bad". Net income grew 11 percent to 2.569 billion Dollars, that translated to 48 US cents per share earnings for the quarter. I would say that you should expect at this click around 200 to 205 cents worth of earnings for the full year. Again, at the aftermarket price (18.12 USD) the stock trades on a forward earnings multiple of less than 9 times. Phew, old tech went cheap in a hurry. But when it was expensive it used to be known as new tech, we will explore that a little later.
Cash, cash equivalents and investments was 45 billion Dollars as at the end of the quarter. That sounds like a lot. In fact, relative to their market cap of just shy of 90 billion Dollars, that is crazy. Nuts. In fact, given that the stock has jumped after market to what roughly translates to a market cap of 96 billion Dollars, their cash, cash equivalents and investments as a percentage of market cap is 47 percent. On an ex cash, cash equivalents and investment basis, the stock trades on an earnings multiple of less than 5 times. What? I can see why the average price target for the analyst community is 21.53 Dollars, as per Yahoo finance.
These are record results against a backdrop of a challenging macro environment. But that does not answer the question, why is the stock so cheap? Perhaps it is John Chambers. Don't ever let life challenges set you back, Chambers overcame dyslexia. However he pays himself (the company pays him, sorry) an awful lot of money. Some people suggest the guy is worth as much as 1 billion Dollars. Holy smokes! Last year the fellow was paid nearly 38 million Dollars. Wow. He has been CEO for 17 years, it will be 18 years in January.
Or perhaps it is that old tech has been discounted out of sight. But the truth is that the company has operating cash flows of around 10 billion Dollars per year. We are going to be patient on this one. The stock looks cheaper and I suspect that it will get a rerating soonest. Stay the course, we are still buyers.