Were Cisco's Earnings Really That Good?

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On Wednesday, Cisco (NASDAQ: CSCO  ) posted solid results for the fiscal third quarter. Investors reacted positively and its stock price jumped 13%, nearing its 52-week high. After such a great run, is Cisco still a sound value play?

A few specs
There may have been a lingering hangover heading into Cisco's earnings release after IBM's (NYSE: IBM  ) less-than-stellar first-quarter results. IBM isn't just a bellwether for the industry. IBM, like Cisco, is in the process of shifting its business focus to high-growth areas, like cloud computing. After a rather paltry 3% increase in non-GAAP income compared to the prior year -- which missed analyst estimates -- investors were unimpressed with IBM's transition efforts, and a $20-a-share sell-off ensued.

Cisco shareholders needn't have worried. CEO John Chambers recognizes the future is "cloud, mobility and video all coming together," and it's beginning to pay off. Not only did fiscal Q3's non-GAAP net income of $0.51 a share beat analyst estimates -- expectations were for $0.49 -- Cisco also notched its ninth straight quarter of record revenue. Cisco maintained its run of positive cash flows, too, boosting what was already a rock-solid balance sheet, including $47.4 billion in cash and equivalents.

The icing on the cake was Cisco's stock repurchases. After the cheering subsides, many stock buyback programs end up being little more than good PR. But in keeping with its strong Q3, Cisco nailed that, too. By the end of the quarter, Cisco had purchased (and retired) a total of 3.8 billion shares at an average price of $20.35 a share; that compares to its closing price of $23.89 on May 16. That's the way share buybacks are supposed to work.

Going forward
After its nice run-up, concerns regarding Cisco's value relative to its competitors are legitimate; shares aren't trading in the high-$16 range anymore.

But even after its 13% jump in share price, Cisco's trailing P/E of 13.95 remains the lowest in the sector, and its forward P/E of just over 11 is even more attractive. For some perspective, Cisco is trading at about a one-third of Ericsson's trailing earnings, and its operating margin is three times that of Juniper Networks and close to five times Ericsson's.

As Chambers said, "Cisco is executing at a very high level," and yet it remains one of the cheapest alternatives around. More proof? Juniper is down over 9% this year, while Cisco shareholders have enjoyed a 21% jump, yet Cisco still trades at a lower multiple than Juniper.

And let's not neglect Cisco's income component. Of its primary competitors, only Ericsson's 3.47% dividend yield can match Cisco's 2.85%. Juniper Networks, with its $9 billion market cap, (wisely) sinks what it can back into the business, not into shareholders' pockets via a dividend. Even IBM, with its 1.86% yield, can't touch Cisco from a dividend perspective.

Some Cisco shareholders might be tempted to take gains after Thursday's run-up, but long-term Fools shouldn't be tempted. At $16.80 a share in November, Cisco was an absolute steal. At $24 a share today, nothing much has changed: Cisco remains a strong growth and income alternative.

Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the low down on the routing juggernaut in The Motley Fool's premium report. Click here now to get started.

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