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Cisco (CSCO) Looks Promising on Upbeat Q1: Should You Hold?

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Cisco Systems (CSCO - Free Report) shares have been rallying since first-quarter fiscal 2019 earnings release on Nov 14. Notably, shares of the company have gained 23.2% in the past year, against the industry’s decline of 1.3%. Its price performance can be attributed to an impressive earnings surprise history. The company surpassed earnings estimates in the trailing four quarters, recording average beat of 3.5%.

Cisco delivered first-quarter fiscal 2019 non-GAAP earnings of 75 cents per share coming ahead of the Zacks Consensus Estimate of 72 cents per share. Further, the figure rose 22.9% from the year-ago quarter.

Revenues increased 7.7% year over year to $13.072 billion and surpassed the Zacks Consensus Estimate of $12.871 billion. Acquisitions contributed 80 basis points (bps) to revenue growth in the reported quarter.

Strength witnessed in the company’s Security and Applications segments drove year-over-year growth. Order strength and improving traction of the subscription-based model were other tailwinds.

Growth Drivers

Cisco had integrated its Cisco Spark with Webex Platform which enhanced Webex Meeting and enabled it to introduce Webex Teams, strengthening the company’s collaboration portfolio further.

Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.

Cisco had also announced a new partnership with Alphabet Inc. The integration was aimed at automating responses in its centers by leveraging data and intelligence from AI.

The company recently announced that it has successfully closed the acquisition of privately-held Duo Security. Further, the integration of Duo’s zero trust MFA technology with Cisco’s network and cloud security platforms is likely to enhance security features and mitigate phishing incidents on devices. This buyout will aid Cisco in delivering its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.

The company also closed its previously announced Burlingame, CA-based July Systems acquisition. The private company provides cloud-based mobile application platform. Per the press release, July Systems team will join Cisco’s Enterprise Networking Group.

The company has also announced an agreement to sell its Service Provider Video Software Solutions (“SPVSS”) business. This transaction is expected to close in the second quarter of fiscal 2019.

We believe that company’s expanding footprint in the rapidly growing security market holds promise. Security solutions of Cisco are likely to witness traction, going forward. The company’s extended partnerships with the likes of Aon, Allianz and Rackspace are likely to boost security segment growth.

Strong Liquidity

Cisco exited the first quarter with cash & cash equivalents and investments balance of almost $42.59 billion, down from $46.55 billion in the prior-year quarter. Total debt (short plus long) came in at $25.56 billion compared with $25.57 billion reported in the previous quarter. The company generated $3.8 billion cash flow from operations down from the previous quarter’s figure of $4.1 billion. Free cash flow came in at $3.6 billion.

In the first quarter, Cisco repurchased approximately 109 million shares of common stock for $5 billion, translating to an average price of $46.01 per share. Furthermore, the company paid a cash dividend of $1.5 billion.

Risks Persists

However, weakness in switching and routing remains a headwind. Moreover, ongoing transition to subscription-based model will continue to hurt the top line. Arista’s (ANET - Free Report) recently disclosed intention of manufacturing switches that connect campus networks is also likely to hurt Cisco as it holds a dominant position in that market.

Bottom Line

A successful investor understands the importance of retaining well-performing stocks in the portfolio at the right time. Indicators of a stock's bullish run include a rise in share price and strong fundamentals. Though there may be some concerns regarding the stock but they are transitory in nature. Hence, considering these factors, investors are suggested to retain this Zacks Rank #3 (Hold) stock at least for the time being.

Key Picks

Infineon Technologies AG (IFNNY - Free Report) and QUALCOMM Incorporated (QCOM - Free Report) are stocks worth considering in the broader technology sector. Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Infineon and QUALCOMM have a long-term EPS growth rate of 8.6% and 11.5%, respectively.

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