Cisco Systems, Inc. has an enviable earnings run to maintain. For the record, the networking bellwether has managed to top, or at least meet, Wall Street consensus estimate in every quarter for the past 5 years. Cisco will release fiscal 2016 first quarter results after the close of trade on Thursday. And earnings beat is pretty much the foregone expectation.
The average of analysts covering the stock is for earnings of 56 cent per share on sales of $12.65 billion. That compares to year-ago figures of 54 cents in earnings and $12.25 billion in revenue.
Cisco Needs to Jump Start Growth
Cisco Systems, Inc. is a perfect example of a firm that is no longer on analyst radars because of its slowing growth. This, despite the fact that the tech major has one of the better balance sheets in the industry. Its revenue has basically been flat over the past few years because of a significant slowdown in its switch gear and router units. As a result, margin levels have been adversely impacted.
The slowdown in its switches and router divisions is primarily due to loss of business in China. Cisco had a massive contribution in the roll out of Internet within the country over the past decade. As a result, China became one of the key markets for the firm.
But things started slipping after Edward Snowden revealed in 2013 that the U.S. government utilized its tech firms to spy on China. This led to a sudden drop in demand within the country, as Chinese authorities started preferring local firms.
However Cisco hasn’t given up on the country, and recently announced it will invest $10 billion in China over the next few years in an attempt to regain lost market share.
Balance Sheet is Strong
Cisco Systems, Inc. is trying its best to return to growth. But until that happens, Wall Street will continue to look unfavorably at the stock. CEO Chuck Robbins wants to focus on the firm’s core strengths, predominantly switches and routers. As part of his efforts, Cisco formed a network alliance with Ericsson, earlier this week. The deal is expected to generate at least $1 billion in annual revenue by 2018.
The tech firm has an extremely strong balance sheet with over $60 billion in cash and investments. Its current 15 percent return on equity is a testament to its strong financials. Furthermore, the huge cash flow should ensure that its increasing dividends and share buybacks are not at risk.
Data from Thomson Reuters shows that 23 of the 40 analysts following the stock rate it as a “buy” or better. The 12-month target price is $33 a share. Cisco Systems, Inc. shares closed Wednesday at $27.82.