It's no secret that today's consumers want gadgetry that can help them download videos and other bulky files fast. In a word, they want bandwidth. And they want it now! In short, Cisco (CSCO) has this trend to thank for its stellar first quarter results.
For those unaware, last week the well-known network equipment maker reported first quarter earnings (excluding special charges) of 31 cents a share, which was about two cents north of Wall Street expectations. The shares, perhaps not surprisingly, shot up more than 6% to $26.71 on the news. And since then a buzz has started to circulate among analysts and traders that things may only get better from here.
But does this mean that investors should be buying the stock near its 52-week high? The answer is resounding yes, with one caveat: I think it makes sense to wait for a bit of a pull back before jumping in. Here's what I like about the company:
Broad Based Growth
Cisco isn't just seeing growth in one product, or in one region of the world. To quote Dennis Powell, Cisco's CFO, "we were hitting on all cylinders. Every product and every geography was performing extremely well for us."
And the truth is, looking at the results, I believe him.
Seriously, it's hard to look through the first quarter income statement and balance sheet and find any glaring problems. The company's revenue is up almost 25% over the comparable period last year, and it's getting paid. As evidence, Days Sales Outstanding (DSOs), as it relates to receivables, is down to 34 days from 38 days in the fourth quarter. And, it's kicking off a boat load of operational cash flow which it can use to advertise, plunge back into R&D, or buy back shares (which it has been doing).
In short, they have so many things going for them, that even if Latin America or Africa for example, were to experience a downshift in order flow, the company would likely still fare well.
Setting The Bar High, But Not Too High
It has to be tempting at this point for management not to put out lofty earnings guidance for the year to come based upon current order flow. To that end, I like the way that John Chambers (Cisco's chief exec) is handling things. Chambers openly suggests that the company should be able to grow at a 24% to 25% clip in the second quarter (versus the comparable period a year ago). But that isn't too much of a stretch. I mean at this point I think he has great visibility, and that the company should easily beat his guidance. In fact, I think he is being fairly conservative.
Sincerely though, I like that he hasn't built any of these unrealistic expectations into the marketplace that the company will experience some sort of supernatural growth. Taking it one quarter at a time really is a smart move in my book.
I mentioned it briefly above, but the fact that the company is buying back shares in the open market is, in my mind, a great sign that even better times may lie ahead. Fact is, during the first quarter alone the company bought back 66 million shares at an average price of $22.85. And since the program's inception, it's bought back almost $37 billion worth of stock. Again, for management to use it precious capital on share repurchases at fairly high stock price levels implies at least to me that even better times may lie ahead.
There is of course some risk to the Cisco story. Management was very clear in its conference call that a slowdown in the domestic economy, and/or changes in capital spending habits by the mid-sized and large corporations that constitute the bulk of Cisco's sales could put the kibosh on further upside movement in the stock.
Also, above I mentioned that I would probably wait for a pullback before buying in. That is because if you look at a chart, the shares look just a bit overextended here. In fact, the average daily trading volume is usually about 53 million shares, but since earnings were released the stock jumped about $2 on more than double the average volume. My point is that the excitement generated from the better-than-expected earnings will wear off pretty soon. And when it does I think the shares will probably fall back to just below the $25 range. This is where I'd feel more comfortable jumping in.
Wall Street analysts peg expected earnings growth over the next year at about 17%. But based upon recent order flow, and more importantly the breadth of recent orders, I think that analysts will probably be ratcheting up those expectations in the months ahead. Even still, based upon next year's anticipated earnings of $1.48 a share, I think the stock is worth at least $30.
One caveat: if the strength the company is experiencing continues into the spring, I believe we could see a material increase in earnings estimates, and by extension, the future stock price. But this of course remains to be seen.
The Bottom Line
I think that tech is really the place to be right now. And among who I think will be the best performers in the year ahead is Cisco. But wait to pull the trigger, ideally when it's under $25. At that level, the stock would look much more attractive on a risk/reward basis.
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