Cisco Has the Fundamentals, however Shares Are Trying Frothy

By Charley Blaine – There’s much to like about Cisco Systems (NASDAQ:CSCO) right now.

The stock is up 29% since bottoming in the Christmas Eve selloff and 20% this quarter, second only to IBM (NYSE:IBM) in the Dow. After reporting fiscal second-quarter results on Feb. 13, the stock is up better than 9.5% and has hit 52-week highs six times, including on Tuesday.

Cisco, the maker of networking equipment used both in the cloud and on internal networks around the world, has generated consistent earnings and revenue growth. Its gross profit margins are still right around 62%, where they’ve been for years. Its quarterly dividend, first instituted at 6 cents in 2011, has just been boosted to 35 cents a share.

It has $40 billion in cash and short-term investments available to deploy. In fiscal 2018, it bought back some $17 billion in shares. In the last quarter it bought back $5 billion more and boosted its buyback authorization to $24 billion.

Meanwhile, China’s Huawei, one of Cisco’s biggest competitors in networking, is accused of being an arm of the Chinese government in alleged efforts to spy on U.S. companies and the government. The Trump administration doesn’t want domestic customers to buy Huawei products and even threatened to withhold classified intelligence from Germany unless it halted plans to buy Huawei equipment for its 5G network.

What could go wrong for Cisco?

Right now, not much. In fact, the government shutdown had little impact on Cisco’s business, CEO Chuck Robbins said on the Feb. 13 earnings call. Most analysts have price targets on the stock in the mid-$50s. Based on earnings growth and a price-to-earnings ratio above 18x, a case could be made for the stock to reach $60.

Technical measures tracked by rate the stock a buy.

One short-term issue is geopolitics, especially the ongoing trade disputes with China. Cisco has a small presence in China and would like to expand it.

A second issue is irrational exuberance.

The shares have doubled since the end of 2014 with gains accelerating since mid-2017. Part of the gains are due to Cisco’s results and an improving economy. Some of the gains are because of the 2017 tax law.

And don’t forget all the share buybacks, which have cut the number of shares outstanding by 11% since mid-2015.

That’s a far cry from the 1990s when Cisco split its stock eight times.