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Does Cisco (CSCO) Look Like a Buy Ahead of Q1 Earnings?

Christopher Vargas

Cisco CSCO is set to report its first quarter results after market close on Wednesday, November 13. The tech giant has seen its shares rise 11.5% in 2019 thus far, lagging behind the broader computer office equipment market’s over 44% run.

Cisco is coming off a fiscal year that sent the stock retreating after the company’s forward guidance exacerbated worries about a potential slowdown in the tech sector. The company is looking to report a quarter that can set the tone for a strong fiscal 2020. Let’s take a closer look at Cisco and what to expect from its first quarter performance.

Weak Guidance Taints Fiscal 2019 Performance

Cisco reported fourth quarter results that beat our estimates on both the bottom and top-line fronts, helping the company bolster its overall fiscal 2019 figures. The firm’s Q4 metrics brought the company's full-year revenue to $51.7 billion, which was up roughly 7% annually, and its adjusted EPS for the period to $3.10, up roughly 20%.

Despite the encouraging top and bottom line performances from the tech giant, the forward guidance management provided for Q1 2020 sent shares lower as investors weren’t satisfied with the company’s expected trajectory.

The company expects sales to come in between 0% to 2% growth year over year in Q1, and its midpoint guidance for adjusted EPS of $0.81 represents Y/Y growth of 8%. Investors felt that the projected growth didn’t justify the $4.5 billion the company spent on stock buybacks last year, as well as the billions spent in efforts to bolster Cisco’s position in fields like cloud services, cybersecurity, analytics, and low-power wide area networks.

Outlook

As the general market has tried to weigh the macroeconomic impact that the US-China trade war has had on the tech sector, Cisco’s Q1 guidance did little to spur an assuring sentiment which prompted the selloff. Management's statements about macro-level shifts in key markets contributing to softer demand in its service-provider category could be cause for concern, especially when considering the sales decline in Q4 in that category.

Management suggests that much of the slowdown is due to enterprises ramping up spending on radio equipment for the transition to 5G. It also said that it will see a sales resurgence in the category once these businesses have the foundation-level tech equipment in place to support their transition to the new networking technology.

Our Q1 consensus estimates forecast 8% bottom line growth to $0.81 per share and a tepid increase in net sales to $13.08 billion. Product revenue is projected to slip 0.81% to $9.81 billion and services are estimated to bring in $3.25 billion for a 2.13% gain. Looking ahead to fiscal 2020’s figures, our estimates predict a 1.79% top-line jump to $52.83 billion and a 7.42% bottom-line climb to $3.33 per share.

Bottom Line

Cisco is currently facing a number of issues within its operations that have worried investors about a growth slowdown. In addition, the trade war has casted macroeconomic headwinds on Cisco that have weighed on the firm’s operations, making it all the more difficult for the company to sustain its growth levels.

However, despite stock buybacks, fast dividend growth, and a big push to acquire businesses and assets, Cisco still boasts a net cash position of roughly $8 billion. The recent pull back in the stock has brought Cisco’s forward multiple down to a discounted level that it often doesn’t stay at for too long. For investors who may believe that Cisco can turn things around in the long-run, the stock’s current valuation is at an opportunistic level.

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