Cisco Systems (NASDAQ:CSCO) has pulled back in recent weeks from its post-dot-com boom highs. Cisco stock fell back after rising by almost 43% in less than four months. Since hitting that high, CSCO stock has declined to the $52 a share level.
Now flirting with correction territory, many wonder if CSCO will fall further as it reports earnings on Wednesday after the market close. If so, with its double-digit profit growth and the future in 5G, I see CSCO stock as a buy on any pullback.
Earnings and Sales Beats Could Boost Cisco Stock
For its third quarter, Wall Street expects Cisco to report earnings of 77 cents per share. If this holds, that would represent a 16.7% increase from year-ago levels of 66 cents per share. Analysts also forecast revenues of $12.9 billion. This would stand as a 3.5% increase from the same quarter last year when the company brought in $12.46 billion.
Cisco stock has developed a reputation for frequently beating earnings over the last 20-plus years. I do not expect anything different this quarter. The company has worked to restore its reputation for something it has seen little of since the 1990s tech boom — stock price increases. Since the beginning of 2016, CSCO stock has more than doubled in value. Last month, it reached its highest level since the fall of 2000 before pulling back.
Wi-Fi 6, 5G Will Drive CSCO Stock
Moreover, as my InvestorPlace colleague Bret Kenwell points out, the San Jose-based networking giant leads the way in the emerging Wi-Fi 6. The Wi-Fi 6 networking stack will offer 400% greater capacity and better performance in high-density areas. Though it lacks the publicity surrounding 5G, where Cisco has pursued a “cloud-to-client” approach, it could become just as significant in many respects. Furthermore, the company’s moves into software and network security have also improved the fortunes of Cisco stock.
Detractors point out that this is not the 1990s, and companies such as Check Point Software (NASDAQ:CHKP), Arista Networks (NASDAQ:ANET), and Palo Alto Networks (NASDAQ:PANW) present genuine competitive threats. Still, while vendors certainly have other choices, Cisco brings a measure of stability and income not found in newer names.
Favorable Financial Metrics Remain
Case in point, CSCO stock trades at a price-to-earnings (PE) ratio that compares well to its younger peers. This valuation stands at around 19.5 times earnings, and it falls to a PE of 15.4 on a forward basis. Moreover, analysts predict the company will deliver profit growth rates of 18.1% this fiscal year and 10.1% in fiscal 2020.
The 19.5x PE comes in at the high end of ranges seen in recent years. If the re-emergence of Microsoft (NASDAQ:MSFT) serves as an example, Cisco stock could benefit from multiple expansion. Even if that does not occur, the profit growth rates alone make double-digit returns in CSCO stock likely.
Investors should also remember one additional benefit to Cisco stock that did not exist in the 1990s — the dividend. Since the company began paying a dividend in 2011, it has increased its payout every year. The most recent increase went into effect in April. Now at an annual payout of $1.40 per share, the yield stands at around 2.5%.
The eight-year streak is a long enough time that the equity’s price will depend heavily on annual payout hikes. I even speculated that Cisco stock would achieve dividend aristocrat status (meaning 25-plus years of annual payout hikes) in 17 years. Time will tell if that occurs. Still, for investors wanting a growth and income play in the networking sector, I see CSCO stock as one of the top choices in the coming years.
Final Thoughts on Cisco Stock
Cisco stock has become a buy on any pullback, and pull back it has. The stock has corrected following a 40%-plus move higher from its December lows. Now, predictions for the upcoming earnings report strongly indicate that its double-digit growth will continue.
If its track record serves as an indication, Cisco stock should beat earnings by at least a penny per share. Bolstered by a move into security and software, as well as its position in both 5G and WiFi 6, Cisco’s double-digit profit growth should continue for years to come. It could benefit further if CSCO stock sees Microsoft-like multiple expansion. Moreover, the eight-year track record of payout hikes adds a growing income stream to add to the returns.
Perhaps Cisco stock rose too far and too fast over the last few months. Admittedly, it makes buying into earnings a riskier prospect despite a recent pullback. However, even with this potential hiccup, the likely rewards in CSCO stock outweigh the possible risks.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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