Despite a fiscal first-quarter earnings report that beat consensus estimates, analysts are giving Cisco Systems (Nasdaq: CSCO) a HOLD rating for now. The report revealed that earnings for the computer networking firm rose 5% year-over-year through the quarter ending on October 29, up 86 cents. In addition, revenue increased by 6% to $13.6 billion.
The earnings beat certainly helped give the San Jose, CA-based digital communications giant a bump, pushing the stock up more than 3% to $45.79 (after the release following the close of day on Wednesday, November 16, 2022.
Looking ahead, the company expects to post a profit of 85 cents per share in the next quarter (which ends in January). They also project revenue will grow by another 5.5% about halfway through the quarter, which would easily beat the 4% growth they expect.
Restructuring Can Help Improve Stability and Growth
Recently announced a round of job cuts to save some money. While the plan may only affect 5% of their current labor force, it still equates to roughly 4,165 layoffs. Cisco announced the $600 million restructuring plan aimed at addressing pretax charges for severance and additional singular termination benefits.
The latest earnings call indicated that Cisco's net income is down to $2.7 billion for the quarter, down from $3 billion from the same period a year ago.
In addition, the company has also revealed they plan to consolidate some of its real estate footprint, though they did not offer any specifics for now. This could be one of the smartest changes they make, as Cisco occupies more than 3.5 million sq. ft of professional real estate across not just Silicon Valley but also in cities like Seattle, Denver, New York, and Austin.
This is quite a conundrum for Cisco, as just last year, the company made some big moves to branch out in both the Midwest and the Southern regions of the United States. Also, in August, last year, Cisco started their expansion into Downtown Chicago, taking over the city's 130,000 sq ft Old Post Office. Two months later, they revealed the 80,000 sf. $41 million “Talent and Collaboration Center,” located in Midtown Atlanta.
Earnings Consistently Beat the Estimate
The earnings beat should not really come as too much of a surprise, though, even as the company struggles to reach a financial balance. For one, earnings per share (EPS) has not only grown in the past four years but has consistently beat the consensus estimate every year since at least 2019. In fact, actual earnings in 2020 ($3.21) beat the range high ($3.17) and met the range high ($3.22) in 2021. Last year, earnings of $3.36 only managed to beat the estimate by just a penny.
While annual earnings are increasing, the last four quarters have been up and down. Earnings was expected to increase between Q2 and Q3 of 2022, which it did: beating the range by a single cent in Q2 (at $0.84) and then misssing the Q3 range high ($0.88) by a penny too. By Q4 of 2022, though, analysts estimated that earnings would fall, slightly, to $0.82. Once again, actual earnings beat the estimate by a cent. Finally, the stock started off the year with a big push, with actual earnings ($0.86) besting the range by a single cent one more time.
Competition is Tight in this Communications Sector
Among its peers, Cisco Systems appears to have a better outlook. Take International Business Machines (NYSE: IBM), for example. Analysts have also given this stock a HOLD rating (as well as a bearish sentiment) but IBM's numbers are not as favorable as CSCO. With a beta of 1, IBM may have zero volatility but it also has a downside of -5.60% at a time when so many other stocks have an upside.
Fortunately, a small downside expectation is IBM's only metric in the red. That said, a Price-to-Earnings ratio (P/E) of 107.77 means everything they earn comes at a high price. On the other hand, CSCO stock carries a far more favorable—and near perfect—P/E of 17.25.
Now, IBM may be up nearly 10.5% on the year so far, while CSCO is down -24.59% but IBM's net margin is only 2.08%. CSCO, on the other hand, has a net margin of 22.00%, which is also nearly perfect.
Another direct competitor of CSCO and IBM is Salesforce (NYSE: CRM). Salesforce has a slightly higher rating of Moderate BUY though it is not easy to see why analysts might have a little more faith in it. For one, it has an upside of 55.90% and at least 26% projected earnings growth, which both suggest long-term growth. A 1.12 beta should not initiate any concern, but it is the only stock on this list that is more volatile than the S&P 500.
On the other hand, a 274.15 P/E ratio is concerning, as well as a P/S ratio of 5.59. Also, the stock is down more than -42.00% on the year and is currently sitting in the bottom 7% of the stock's 52-week range.
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