Cisco Systems, Inc. (CSCO) is scheduled to report its third-quarter results on May 15. Wall Street expects the company to post lower earnings and revenue than the prior-year quarter. In this piece, we examine the company’s fundamentals to see whether the stock could be a solid buy before its earnings or if investors should get rid of it.

For the third quarter, CSCO’s EPS and revenue are expected to decrease 18.7% and 13.4% year-over-year to $0.81 and $12.62 billion, respectively. Yet, the company has a stellar history, having beaten the consensus EPS and revenue estimates in each of the trailing four quarters.

The network gear maker reported adjusted earnings of $0.87 per share for the January quarter, slightly lower than the $0.88 per share recorded in the same period last year, but still exceeding expectations. Non-GAAP net income for the second quarter amounted to $3.54 billion or $0.87 per share.

Despite a 6% decrease in revenues to $12.79 billion, total software revenue remained flat year-over-year, while software subscription revenue saw a 5% increase from the prior year. Cisco’s CEO, Chuck Robbins, emphasized the company’s ongoing investments in innovation to capitalize on future growth opportunities, particularly in the realm of AI and organizational security.

Looking ahead, the company expects its third-quarter revenue to come in between $12.10 billion and $12.30 billion. However, this revenue guidance is lower than Street estimates. Its non-GAAP gross margin rate for the third quarter is expected to be between 66% and 67%. In addition, its non-GAAP operating margin rate is expected to be between 33.5% and 34.5%. Also, its non-GAAP EPS is expected to be between $0.84 and $0.86.

CSCO’s shares have gained 4.2% over the past year, closing the last trading session at $48.68.

Here’s what you might want to consider ahead of its upcoming earnings release:

Recent Developments

On May 8, the company launched a new virtual appliance for its AppDynamics On-Premises application observability solution, offering self-hosted observability with AI-powered features for anomaly detection, root cause analysis, application security, and SAP monitoring.

Additionally, CSCO introduced AppDynamics Flex, a flexible licensing model enabling customers to choose between self-hosted and Software-as-a-Service (SaaS) observability options and transition seamlessly as needed.

Last month, CSCO completed the acquisition of Isovalent, Inc., which is a leader in open-source cloud-native networking and security. This strategic move aims to bolster its secure networking capabilities across public clouds. Integrating Isovalent’s innovative technologies will build on the Cisco Security Cloud vision, an AI-driven, cloud-delivered, integrated security platform for organizations of any shape and size.

Overall, these developments highlight the company’s strategic focus on innovation and customer-centricity, which could positively impact the company’s competitiveness and market share in the long run.

Attractive Dividend

On April 24, 2024, the company paid a quarterly dividend of $0.40 per common share, representing an increase of 3% from the previous quarter. CSCO pays a $1.60 per share dividend annually, which translates to a 3.33% yield on the current share price. Its four-year dividend yield is 3.06%.

The company’s dividend payouts have grown at CAGRs of 2.69% and 3.22% over the past three and five years, respectively. Moreover, CSCO has a record of 12 years of consecutive dividend growth.

Solid Financials

For the six-month period, which ended January 27, 2024, CSCO’s total revenue increased marginally year-over-year to $27.46 billion. Its gross margin grew 6% over the prior-year period to $17.77 billion. The company’s non-GAAP operating income stood at $9.59 billion, up 9.6% year-over-year.

In addition, its adjusted net income and non-GAAP earnings per share came in at $8.07 billion and $1.98, representing an increase of 12.2% and 13.1%, respectively, from the same period last year. Also, its cash, cash equivalents, restricted cash, and restricted cash equivalents at the end of the period rose 44.8% from the prior-year period to $15.22 billion.

Favorable Annual Analyst Estimates

Analysts expect CSCO’s revenue for the current year (ending July 2024) to reach $53.54 billion and its EPS to be $3.63. Its fiscal 2025 EPS and revenue are expected to register a year-over-year growth of 1.8% and 5.3%, reaching $3.70 and $56.38 billion, respectively.

Outstanding Profitability

In terms of the trailing-12-month gross profit margin, CSCO’s 64.22% is 31.6% higher than the 48.79% industry average. Likewise, its 30.88% trailing-12-month EBITDA margin is 219.7% higher than the industry average of 9.66%. CSCO’s trailing-12-month levered FCF margin of 24.03% is 142.5% higher than the 9.91% industry average.

Furthermore, its trailing-12-month net income margin, ROCE, and ROTA of 23.49%, 30.65%, and 13.29% are substantially higher than the industry averages of 2.40%, 3.06%, and 1.26%, respectively.

POWR Ratings Show Promise

CSCO’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCO has an A grade for Quality, consistent with its high profitability. Also, its 0.86 beta justifies its B grade for Stability.

CSCO is ranked #10 out of 47 stocks in the Technology – Communication/Networking industry. Click here to access CSCO’s Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

Although CSCO’s earnings and revenue are expected to decline during the third quarter, its long-term prospects look bright as it aims to boost its offerings and meet its customers' evolving needs. Further, the recent acquisition of Isovalent strengthens CSCO’s position in cloud-native networking and security, enabling it to offer more comprehensive solutions in a multi-cloud environment. As a result, its software offerings are expected to strengthen its top and bottom lines over time.

Additionally, the tech stock exhibits strong profitability,  solid financials and offers a lucrative dividend, making it an attractive investment option. Considering these factors, investing in the stock could be a wise choice now.

How Does Cisco Systems, Inc. (CSCO) Stack Up Against Its Peers?

While CSCO has an overall grade of B, equating to a Buy rating, you may also check out these other A (Strong Buy) or B (Buy)-rated stocks within the Technology – Communication/Networking industry: AudioCodes Ltd. (AUDC), Ceragon Networks Ltd. (CRNT), and Gilat Satellite Networks Ltd. (GILT). To explore more Technology – Communication/Networking stocks, click here.

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CSCO shares . Year-to-date, CSCO has declined -2.10%, versus a 9.93% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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