Cisco Earnings: The Market's Disappointment Creates Opportunity

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

As the focus shifted back from policymakers to earnings, U.S. stocks were essentially unchanged on Wednesday, with the benchmark S&P 500 index down just 0.03%. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 0.19%. Tech bellwether and Dow component Cisco Systems (NASDAQ: CSCO  ) reported its fiscal second quarter results after today's market close and after-hours trading in the stock suggests investors aren't impressed: shares of Cisco were down 4.2% at 5:55 p.m. EST.

First, let's tackle the numbers: Cisco earned $0.47 per share (on an adjusted basis) on $11.2 billion in revenue, which compares favorably with Wall Street's consensus estimates of $0.46 per share and $11.0 billion in revenue. The company also beat with regard to EBITDA(earnings before interest, taxes, depreciation and amortization – a crude measure of cash flow), with $3.71 billion versus $3.65 billion. In short, the headline numbers for the last quarter are not what is causing the stock to sell off.

Moving on to the outlook for the current quarter (at the last earnings report, Cisco's downbeat outlook roiled the market): CEO John Chambers told analysts and investors on the earnings call that he expects fiscal third quarter revenue to experience a 6% and 8% decline year-on-year (for reference, last quarter's revenue fell 7.8% relative to the prior year quarter) -- in line with analysts' consensus estimate, which implies a 7.2% drop.

On the outlook for earnings, CFO Frank Calderoni said Cisco expects to earn between $0.47 and $0.49 per share in the current quarter. What was the consensus estimate? $0.48. All down the line, what is announced is consistent with or superior to expectations, not to mention a $0.02 increase in the quarterly dividend, to $0.19 and 185 million shares repurchased at a value of $4 billion (average price: $21.71 -- roughly where the stock is trading in after-hours). So where is the problem?

Finally, when we drill down to product categories, we find that Cisco's core categories, switching and routing products recorded a 12% and 11% year-on-year revenue decline (note that these declines are larger than those of the business as a whole). The switching business, in particular, generated $3.27 billion in revenue, where analysts were looking for $3.31. (We found a miss!)

Bottom line: I would respectfully suggest that the market is nitpicking here. I don't see anything in these results that warrants a 4% to 5% drop in the share price -- unless you're playing the quarterly "game the expectations" tournament. On the other hand, this evening's drop, should it persist into tomorrow's session (and I expect it will), gives long-term, fundamentally oriented investors to buy shares that offer even better value. At 11.6 times the next 12 months' earnings-per-share estimate -- before any decline -- they already look attractive.

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  • Report this Comment On February 12, 2014, at 7:57 PM, rcheerla wrote:

    The trends in data center, and the move into the cloud (away from enterpise) are Cisco problems long term.

    The fear is that the YOY reveneue drop points to a longer term growth issue for Cisco.

  • Report this Comment On February 12, 2014, at 11:10 PM, jiltin wrote:

    Back in past, I believed such post from Fool.com like SSNI and purchased shares and burnt my money.

    This is pure BS. I know why this company goes down. It is not worth investing.

    If such posts are repeated without proper analysis, fool.com will be doomed soon.

    Sorry to be very blunt, this is not right on Alex part.

    It is clear sinking ship...Not like AAPL or GOOG.

  • Report this Comment On February 13, 2014, at 12:03 AM, andresmitchell wrote:

    "The Market's Disappointment Creates Opportunity." Again? Like last quarter? Like next quarter? Like the last decade? Every disappointment can't create an opportunity. At some point, the disappointment is just a disappointment and in Cisco's case, more disappointment to come.

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