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Cisco (CSCO) to Invest $4 Billion in Mexico to Boost Output


Trades from $3

Shares of Cisco Systems, Inc. (CSCO - Analyst Report) have been scaling steadily higher over the last 12 months. The company’s stock provided a return of 24.46% as compared to the S&P 500’s 13.09% over the period.

Notably, the company’s stock was up 1.35% on Tuesday afternoon, following a Reuters report that the company is ramping up its investments in Mexico to the tune of $4 billion in a bid to increase production.

Cisco plans to deploy the amount in Mexico through 2018. Additionally, it intends to secure contracts with independent manufacturers for production rather than augmenting its own facilities that it already has in the country.

The move will boost the company’s output of products such as routers, switches, servers and wireless access points.

Focus on Mexico

Mexico is rapidly emerging as the preferred outsourcing destination for many American companies. The country’s lower labor costs coupled with geographical proximity to the U.S. and a conducive business environment is helping the nation to attract investments and fuel economic growth.

We note that, in Apr 2016, Ford Motor Co. (F - Analyst Report) announced that it intends to invest $1.6 billion in the country to set up a small-car facility.

In Jun 2015, AT&T, Inc. (T - Analyst Report) announced a whopping investment of nearly $3 billion in Mexico to augment its mobile internet service. Earlier that year the company had spent $4.4 billion for acquiring Nextel Mexico and Iusacell. 

Our Take

Cisco Systems is a leading provider of IP-based networking and other products. The company’s fiscal fourth-quarter earnings were above the Zacks Consensus Estimate. We are positive about the company’s market position, its ability to innovate, product range, growth initiatives, new investments and dividend payout. Additionally, overall growth prospects remain positive because of the drive toward cloud computing and increasing data flow on carrier and computing networks.

Cisco’s decision to deploy additional funds in Mexico comes at a time when the company is considering a 7% job cut worldwide. As per a Bloomberg report, Cisco intends to invest the savings from the job cuts in emerging sectors such as connected services and cloud computing.

However, increasing competition and challenges in China remain concerns for the company in the long run.

Zacks Rank & Key Picks

At present, Cisco carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology space is Lantronix, Inc. (LTRX - Snapshot Report) sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, the estimates for Lantronix for the current fiscal year have narrowed down from a loss of 21 cents to a loss of 8 cents.

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