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Buy Cisco (CSCO) Stock After Earnings Despite China Tariffs & Huawei Concerns?

Benjamin Rains

Cisco CSCO shares surged over 7% in morning trading Thursday on the back of a stronger-than-expected quarterly financial report after the closing bell Wednesday. The maker of switches, routers, and other hardware used to connect computers and communication services provided solid guidance amid increased U.S. and China trade war worries.

Quick Earnings Overview  

Cisco posted adjusted Q3 fiscal 2019 earnings of $0.78 per share. This marked an 18% jump from the year-ago period and beat our $0.77 a share Zacks Consensus Estimate. Investors should note that Cisco has an impressive history of quarterly earnings beats, which means Wall Street might have already priced in an earnings beat. Therefore, the tech giant’s 4% revenue growth, which also topped our estimates, could have pushed the stock up Thursday morning—CSCO’s revenue popped 6% when normalized for divestments.  

Furthermore, Cisco provided strong Q4 fiscal 2019 earnings guidance of between $0.80 and $0.82 per share, which came in above our $0.80 estimate. The company also expects its fourth-quarter revenue to grow between 4.5% to 6.5%. Overall, Cisco showed that its transformation into a more diverse and modern tech firm has continued to pay off.

Shares of CSCO had climbed roughly 7.15% to $56.19 per share through morning trading, just off its 52-week intraday highs of $57.53. Overall, Cisco stock is up over 30% in 2019 to top its industry’s 19% average climb and the S&P 500’s 13%.

Stepping back further, investors should know that Cisco shares have outpaced its industry’s average over the past five years and crushed its peer group’s nearly sideways movement, which includes the likes of NetGear NTGR and Motorola MSI. Furthermore, CSCO has topped Google’s GOOGL 120% climb over this stretch and Apple’s AAPL 121% expansion.



Outlook, China Impac & Huawei

As we mentioned earlier, the historic San Jose, California-headquartered firm now sells everything from security offerings to solutions for cloud computing, data centers, the Internet of Things, and more. Of course, much of Cisco’s business still surrounds routers and switches. However, only a small percentage of its sales come from China and the firm has addressed Trump’s previous 10% tariffs and is ready for the increased 25% duties as well.

“We still have some manufacturing happening in China, but we have greatly, greatly reduced our exposure working with our supply chain and our suppliers…” CFO Kelly Kramer said on the company’s earnings call when asked how new higher tariffs would impact Cisco. “We have incorporated in the guide that we gave for Q4 and we think we can manage through that. Of course, we'll be watching that as the quarter goes on.”

On top of the tariffs directly related to the U.S. and China trade dispute, Trump recently issued an executive order declaring a national emergency preventing U.S. companies from using information and communications technology equipment from sources that “poses an unacceptable risk to the national security of the United States.”

The basic idea here is that the U.S. is trying to prevent the expansion of Huawei Technologies Co. around the globe because of its close ties to the Chinese government. Huawei is one of Cisco’s biggest rivals, which could be good for Cisco—if we put aside the uncertain geopolitical implications for now (also read: Trump Issues National Emergency in Telecom: Likely Gainers).

What could hurt Cisco is a broader economic downturn caused, in part, by the U.S.-Chinese trade war as its offerings are often seen as an indicator of overall corporate health and spending. Clearly, many companies in both the U.S. and China would face tough times ahead if the ongoing fight lasts much longer. This is why some analysts and economists believe some type of resolution between the world’s two largest economies is likely.



Bottom Line

Our current Zacks Consensus Estimates call for the company’s adjusted full-year earnings to surge 17.7% on the back of 4.7% revenue growth. Peeking further ahead, Cisco’s fiscal 2020 EPS figure is projected to climb 10.5% above our current-year estimate on 3.4% higher revenues. These projections could, of course, change as more analysts update their estimates following its strong Q3 2019 earnings release.

Along with these solid top and bottom-line growth estimates, we can see that Cisco’s valuation picture appears a bit stretched compared to where it has traded over the last decade. Yet, CSCO’s forward P/E ratio of 17.6X comes in below its 10-year high of 20.2X and we can’t forget that the firm’s stock price has climbed over the last five years, especially in relation to its industry, which helps justify its higher price to earnings ratio.

Plus, Cisco currently pays a $0.35 quarterly dividend, for a 2.67% yield. This represents a 6% increase from last year and a 20% improvement on a two-year stack. Cisco is a Zacks Rank #3 (Hold) that sports “B” grades for Value, Growth, and Momentum in our Style Scores system. Clearly, CSCO seems like a stock to consider as the company plays a key roll in the expansion of computers, internet, and other connectivity services. And it seems set to diversify, as it tries to navigate the current global economic uncertainty.

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