Cisco Shares Will Pop on Thursday; They're Still a Good Long-Term Bet

This quarter, Cisco surprises to the upside with a cheery outlook.

May 14, 2014 at 7:00PM

U.S. stocks fell on Wednesday, with the benchmark S&P 500 down 0.5% and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) down 0.6%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) lost 0.7%, but it's the small-capitalization segment that is giving the punditocracy fits, as the Russell 2000 Index dropped 1.6%, for a total decline of 9.1% relative to its 52-week high.

I don't think small-caps' underperformance is anything mysterious or unsettling: Small-capitalization stocks got ahead of themselves in terms of valuation; what we're now witnessing is nothing other than a healthy correction.

In company-specific news, Cisco Systems (NASDAQ:CSCO) will help lift the Dow and the Nasdaq tomorrow, as the company signaled a return to growth in its latest quarterly report. Cisco's results and outlook were well received by investors in the after-hours session; shares were up 7.2% at 7:59 p.m. EDT.


Source: Cisco Systems.

On the headline numbers: Cisco beat Wall Street's expectations with regard to both revenues and earnings per share in its fiscal third quarter ending April 26, as the following table highlights:


Actual/Year-on-Year Growth (Decline)

Consensus Estimate


$11.54 billion


$11.38 billion

Earnings per share*




Free cash flow

$2.8 billion



*Adjusted Source: Cisco Systems, Thomson FN.

Roughly 20% of the $0.03 "beat" on earnings per share (the difference between the $0.51 achieved and the $0.48 consensus estimate) is attributable to Cisco's repurchase of roughly 90 million shares during the quarter, but I have no problem with this, as the $22.24 average price per share Cisco paid represents a discount to intrinsic value.

On the face of it, the 5.5% year-on-year decline in revenues looks like a concern, but Cisco CEO John Chambers sees a return to growth on the horizon. During the earnings conference call, he said he believes Cisco will get back to mid-single-digit revenue growth before downplaying expectations, telling analysts: "[W]e want you all to not get ahead of us on this. We have some real heavy lifting to do." 

Chambers is right to add some caveats: Analysts are a tough group to herd, for they are obsessed with nice, neat, linear growth rates (for mature companies, that is). Unfortunately, the real world does not always conform to that model; two quarters ago, Cisco startled sell-side analysts with its fiscal second quarter and full-year guidance. However, three quarters into its fiscal year, the $1.95 to $2.05 range for earnings per share Cisco gave at the time looks spot-on. (For reference, three quarters into its fiscal year, Cisco has cumulative earnings-per-share of $1.51, with a consensus estimate for the fourth quarter of $0.51.)

On the release of Cisco's prior quarterly earnings, I suggested that the market's disappointment created opportunity, writing that "this evening's drop, should it persist into tomorrow's session (and I expect it will), gives long-term, fundamentally oriented investors the opportunity to buy shares that offer even better value." It's too early to make any definitive assessments of that call, but since the publication of my article, Cisco's stock has roughly matched the performance of the S&P 500 and beaten the Nasdaq, which is underwater over the period.

Today's after-hours bump looks like a correction of last quarter's (negative) overreaction. At a forward price-to-earnings ratio of just 10.7, owning Cisco shares is a bet that continues to make sense -- even after the "pop" they will likely experience tomorrow.

Cisco is investing to capture part of a $19 trillion opportunity. You can, too.
In this afternoon's earnings call, Chambers touted Cisco's participation in a huge emerging growth industry, telling investors and analysts that "we are making measurable progress connecting the 19 trillion value we have identified." But Chambers isn't the only one monitoring that space -- The Motley Fool's expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns in this multitrillion-dollar industry. Click here to get the full story in this eye-opening report.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers