Cisco powers ahead

Cisco rallied like crazy yesterday, the stock added 12.6 percent on the day. Remarkable really, to add shy of 15 billion Dollars worth of value in a single day, but the results in the prior session were that good. They really were. We have been really patient on this one, and it seemed for a while that there were several shareholders starting to lose the faith. Losing the faith with John Chambers (CEO and chairman), losing the faith with margins slipping and most importantly losing the faith the structure and product development. George Michael would say that you have to have faith. And hope. But, according to Red (Morgan Freeman in Shawshank redemption) in that movie: "Let me tell you something my friend. Hope is a dangerous thing. Hope can drive a man insane."


I get the sense that in a credit card society that we live in, stocks not moving when the rest of the market moves is an irritating thing. With the recent moves upwards in Cisco however, the stock has marginally outperformed the rest of the market. Just. Over three years however the stock has barely budged, whilst the S&P 500 is up 50 percent. So you can definitely understand why investors and ourselves have been getting antsy. The definition of antsy is when someone cannot sit still, they have ants in their pants. Antsy. Ancy is a place. So is Ancey.


The reason for owning Cisco is pretty simple. As the internet moves to providing a more meaningful part of peoples every single day lives, the larger the "lanes" required to be able to process the requests. The accessibility of the internet has been made easier by both smartphone and tablet dominance over the PC (the what?) and notebooks. And that means more on time, which can be very disruptive, having to check out Facebook and Twitter and the like just to make sure that you are in control somehow. So, the information needs to be channelled, that is exactly what Cisco are. Cisco are like the Panama Canal, that made life so much easier for shippers, that is another story entirely however. Cisco manufacture all sorts of networking equipment, routers, switches, IP phones, blade servers, that is just the hardware side, the services side of the business is just as important. If not more so, in a world of more and more data to store. Cloud computing and massive storage facilities are going to become the norm, rather than a fad.

Think of your own data footprint. How much have you accumulated in your life so far? 10 Gigs? Possibly ten times that, easily. In countries like Switzerland almost everyone has a computer, around 850 per 1000 people. I guess they all have smartphones and possibly tablets too. But even in places like Italy, the number of computers per 1000 people is (according to Nationmaster: Personal computers (per capita) (most recent) by country) low, 366 per 1000 people.


But in places like Malawi, it is less than 2 computers per 1000 people. What? Yes. That is incredibly sad, that would suggest that Malawians, ordinary folks, have never had the opportunity to do what you and I do each and every day, when we fire up our juice box. It is second nature to us, but for much of the developing world, this is not the case. Phones are changing much of that. In Italy, for instance, almost everyone has a mobile phone, according to the same folks doing the measuring, 92.65 per 100 people.


Smartphones have changed the way we consume data, and that trend is advancing at a rapid pace in emerging markets. In the recent MTN results, they showed that smartphone adoption in Nigeria was advancing at a rapid rate, up 111 percent from the prior year. Admittedly we are only talking about a few million people, so the base is low, but hey, that is a huge number nevertheless. So for Cisco, providing the gateway for all these connections, that means the growth is still to come. Whilst the world might be connected from a mobile calling point of view, the data revolution has only happened where rich people live. That is why we own Cisco, more people, making more connections, chewing more data. It is like owning the highways of the internet, the only difference is that the hardware (the road) needs to be upgraded more often.


The most impressive thing about the Cisco top line (5.4 percent higher on the comparative quarter in 2012) was that the bottom line grew by more, much more. The company reported 46 cents in earnings for the quarter, a 15 percent improvement on the prior comparative quarter. This is against the backdrop of all their market peers reporting much lower than anticipated results. As such the beat was a real quality one. Perhaps this is quite similar to the things that Johann Rupert was talking about, giving the analyst community stick when the company was trying to execute on a plan. These things take a lot of time. The quarterly dividend is 17 cents, the dividend yield, even after the price surge last evening, 2.8 percent.

But that does not matter. What matters is the future, what matters is how they, Cisco are going to execute on their plan. The hyperactive crowd is now hailing the same guy, Chambers, as a hero. He was supposed to be gone, according to the same crowd. The company guided quarterly EPS to be 50 to 52 cents, in line strangely with the analyst community, who had 51 cents. The company is upbeat about the future, even if it is tough for now, some of their key markets are showing a sign of bottoming. We are happy that we were patient, but the stock is still cheap. Relative to the hardware manufacturers, IBM is on about the same rating now. Good, Cisco deserve their rating.