3 Strikes And You’re Not Out

In the game of baseball, it’s 3 strikes and you’re out. 

However, Cisco Systems (CSCO) is currently sitting on 3 strikes, but it’s not out yet. 

When the company reported earnings last week, interest skyrocketed.

Search volume for the blue chip company tripled as investors sifted through the results.

Apparently, many didn’t like what they saw as the stock plummeted the next day.

You see, supply chain issues are significantly hurting communications equipment manufacturers like Cisco, which relies on components from China to make firewalls. 

Furthermore, inflation is getting out of control, and having a negative impact on businesses and the economy. 

And lastly, sentiment for tech stocks hasn’t been this bad since the dot-com bubble. 

But despite these 3 strikes, CSCO deserves a hard look because it is a beautifully managed company. 

Check out our analysis below… 

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Cisco Systems (CSCO) Business

CSCO designs, manufactures, and sells internet protocol-based networking and other products related to the communications and information technology industry. 

It provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products that are designed to work together. 

CSCO offers IoT analytics software, conferencing software, security products, cloud, and email security, identity and access management, and advanced threat protection.

The firm breaks its revenues down into two segments: Product and Service. 

On its Q3 2022 earnings statement, CSCO reported total revenue of $12.8 billion. Product revenue was up 3%, and service revenue was down 8%. Its strength in product revenue was led by Agile Networks up 4%, Internet for the Future up 6%, End-to-End Security up 7%, and Optimized Application Experiences up 8%. Meanwhile, Collaboration was down 7%.

The firm is transitioning its business to focus more on subscriptions and software. 

Total subscription revenue in Q3 2022 was $5.5B. And total software revenue was $3.7B. 

Unfortunately for Cisco, management highlighted supply chain issues stemming from China that dampened the company’s forward product outlook.

Financials

CSCO has a gross profit margin (TTM) of 63.15%, which is considerably larger than the sector median of 50.29%. It’s managed to improve these as it transitions towards more service and subscription-based revenue.

If there is one knock on CSCO it’s growth. The firm’s revenue growth (YoY) stood at 5.6%, which is significantly weaker than the sector median of 20.28%. Plus, the management couldn’t give an accurate forecast for the coming months due to logistics issues.

The company has a strong balance sheet, with free cash flow north of $13.7 billion (TTM). CSCO pays its shareholders $1.52 per share annually. 

In 2021 CSCO had a current ratio of 1.49x, which means its assets were 1.49x greater than its short-term liabilities.  

Furthermore, ORCL in 2021 had a quick ratio of 1.32x,  which means its highly liquid assets were 1.32x greater than its short-term liabilities. 

The capital structure for CSCO is as follows: total debt of $9.42 billion and cash upwards of $20.11 billion, and a market cap of approximately $178.38 billion. However, the company has almost $30 billion in total non-current liabilities.

That’s not much of an issue given the business generates around $14 billion in free cash flow each year.

Valuation

CSCO has a price-to-sales ratio of 3.48x, which is worse than the sector median of 3.03x.

However, it scores big on one valuation metric. CSCO has a P/E GAAP ratio of 15.07x, which is better than the sector median of 24.62x

At its current price, CSCO pays an attractive dividend, which yields 3.47%. 

Interestingly, the company carries a healthy price to cash flow ratio of 12.69x for the trailing 12 months and 12.71x looking forward. The deterioration stems from inflationary and revenue pressures.

Our Opinion – 7/10

CSCO has seen its shares dip by more than 30%. Partly due to supply-chain issues out of Asia. And the broad market sell-off in tech. 

With neither of these issues seen to be resolved any time soon. We expect prices to linger down here for some time. 

That said, CSCO is a healthy company with a lot of value. As revenues transition to more subscriptions, we expect margins to expand.

Ultimately, we just want to see the stock and broader technology sector bottom before stepping in.