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Cisco – Transforming to Drive Sustainable Shareholder Value

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This is an introduction to my Cisco Systems, Inc. (CSCO) stock analysis which is based on Q3 2018 results and management's guidance for Q4.

Summary

  • CSCO continues to shift toward the development and sale of more software and subscription-based offerings so as to improve the predictability of its revenue.
  • It has an extremely strong balance sheet and generates significant FCF on an annual basis.
  • I expect investors will continue to be rewarded with double digit percentage annual dividend growth.
  • CSCO has a $31B share repurchase program authorization which is expected to be utilized over the next 18 to 24 months.
  • CSCO is not as attractively valued as at the time of my February 15, 2017 article. I am, however, of the opinion investors with a 10+ years investment time horizon will be aptly rewarded through an investment in CSCO at current levels.

Introduction

I have mentioned in previous articles that many investors rely almost exclusively on stock screeners to identify investment opportunities. I do not dispute that stock screeners can assist in distilling the universe of companies into a smaller subset of companies that warrant further analysis. Investors, however, should be cognizant that the output based on certain search parameters can eliminate truly wonderful companies.

In some cases, these ‘eliminated’ companies have truly superior balance sheets. They also have competitive advantages which enable them to quickly increase their earnings power in ways that a cursory analysis of certain metrics does not make apparent.

Examples of such companies include Berkshire Hathaway (NYSE: BRK-a and BRK-b), Microsoft (NASDAQ: MSFT), Johnson & Johnson (NYSE: JNJ), Visa (NYSE: V), MasterCard (NYSE: MA), and Cisco (NASDAQ: CSCO). For the sake of full disclosure, shares in all aforementioned companies are held in the FFJ Portfolio (details disclosed to Financial Freedom is a Journey subscribers) or in accounts that are kept confidential.

This article addresses my rationale for holding CSCO and why I am of the opinion it is extremely important to pay attention to valuation levels in your investment decision making process.

In my February 15, 2017 CSCO article I concluded with:

‘I see it more as a company that will continue to plod along, will generate strong cash flow, and will continue to reward shareholders with steady dividend increases. There is absolutely nothing wrong with a company of this nature and if CSCO’s profile now fits your investment criteria, I would not hesitate to acquire some shares over the course of a few months.’

My sentiment has not changed even though CSCO is no longer as attractively valued as at the time of my previous article.

At the time of that article, CSCO was trading at ~$33, non-GAAP diluted EPS for FY2017 was projected to come in at $2.34 (~14.1% forward adjusted PE), diluted GAAP EPS was expected to come in at ~ $1.90 (~17.4% forward PE), and the FY2017 dividend of $1.10 yielded ~3.3%.These metrics alone, were sufficiently attractive to warrant further analysis by a potential investor.

If such an investor had undertaken a review of the Q2 2017 10-Q, they would have noticed CSCO had ~$72B in cash and short-term investments versus ~$62.4B in TOTAL liabilities.

CSCO has since reduced its cash and short-term investments to ~$54.4B and its total liabilities amount to ~$67.4B as at Q3 2018. A significant proportion of this reduction in cash and short-term investments relates to $11.1B charge resulting from the enactment of the Tax Cuts and Jobs Act ($8.9 billion related to the U.S. transition tax, $1.2 billion related to foreign withholding tax and $1.0 billion related to the re-measurement of net deferred tax assets. The remaining $0.2 billion was related to other significant tax matters).

Despite this significant change in cash and short-term investments relative to TOTAL liabilities, a company with such a high quality balance sheet should certainly pique an investor’s attention.

Please click here to read my CSCO stock analysis.

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By |May 19th, 2018|General Investing|Comments Off on Cisco – Transforming to Drive Sustainable Shareholder Value

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