Investors’ hopes that the Federal Reserve could pivot from hiking interest rates to cutting them later this year powered the Nasdaq to its best-ever start to the year since 1975. The tech-focused index rose 384.50 points on Thursday, or 3.3%, to 12200.82.

Nevertheless, a 25-bps hike in interest rates this week would put further pressure on stressed margins of various tech businesses scrambling to survive profitably amid high borrowing costs.

However, Cisco Systems, Inc. (CSCO) is well placed to keep performing in the foreseeable future.

CSCO designs, manufactures, and sells internet protocol-based networking and other products across networking, security, collaboration, applications, and the cloud. The company operates through three geographic segments: the Americas; Europe, the Middle East, and Africa (EMEA); and Asia Pacific, Japan, and China (APJC). 

Over the past three years, CSCO’s revenue has grown at a 0.2% CAGR. During the same period, the company also registered EBITDA and net income growth of 3.8% and 1.5%, respectively.

The stock has gained 3.8% over the past month and 9.8% over the past six months to close the last trading session at $49.32, above its 50-day and 200-day moving averages of $48.24 and $45.72, respectively.

Let’s closely examine the factors that make it seem like a sure-fire investment now.

Solid Financials

For the fiscal 2023 first quarter ended October 29, 2022, CSCO’s revenue increased 5.4% year-over-year to $13.6 billion, while its operating income increased 3% year-over-year to $3.54 billion. The company’s non-GAAP net income increased 2.1% year-over-year to $3.55 billion, and EPS increased 4.9% year-over-year to $0.86.

Optimistic Analyst Estimates

Analysts expect CSCO’s revenue and EPS for the fiscal year 2023 to increase 5.7% and 5.6% year-over-year to $54.51 billion and $3.55, respectively. Revenue and EPS are expected to increase by 4.1% and 8.1% during the next fiscal to $56.75 billion and $3.84, respectively.

CSCO has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.

Attractive Dividend Payout

On January 25, CSCO paid its quarterly cash dividend of $0.38 per common share. The company pays a $1.52 per share dividend annually, which translates to a forward yield of 3.08% at the current price. This compares favorably to the four-year average dividend yield of 2.98%.

CSCO has increased its dividend payouts for 11 consecutive years. Over the past five years, the company’s dividend grew at a 5.6% CAGR.

Outstanding Profitability

CSCO’s trailing-12-month gross profit margin of 62.23% is 27.2% greater than the industry average of 48.94%. The company’s trailing-12-month EBITDA and net income margins of 30.34% and 22% compare to the respective industry averages of 11.14% and 3.22%.

Additionally, CSCO’s trailing-12-month ROCE, ROTC, and ROTA of 27.72%, 17.02%, and 12.36% compare to the respective industry averages of 5%, 3.13%, and 1.47%, respectively.

POWR Ratings Reflect Robustness

CSCO’s steady fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCO has an A grade for Quality, consistent with its outperformance with respect to profitability and capital allocation.

It has a B grade for Stability, as indicated by its beta of 0.97.

CSCO ranks #4 of 49 stocks in the Technology – Communication/Networking industry.

Click here to see the additional POWR Ratings for CSCO’s Growth, Value, Sentiment, and Momentum.

Bottom Line

On January 31, at Integrated Systems Europe (ISE) 2023, CSCO showcased its new range of collaboration devices for Microsoft Teams and unveiled the new Cisco Table Microphone Pro, a digital and multi-directional table microphone for hybrid workspaces, along with audio interoperability advancements.

A reversion to the golden, or rather hybrid, mean, from the unsustainable extreme of working from anywhere at the height of the pandemic, is currently underway across workplaces globally. With the needs of hybrid workers in mind, the innovations deliver more inclusivity and choice for meetings while improving the manageability, configuration, and security required by IT.

In addition, robust financials, capital discipline, income generation track record, and optimistic prospects make CSCO an apparently obvious choice for market-beating returns in the foreseeable future.

How Does Cisco Systems, Inc. (CSCO) Stack up Against Its Peers?

While CSCO has an overall POWR Rating of B, which equates to a Buy, investors could also consider looking at its A-rated industry peers: Extreme Networks, Inc. (EXTR), AudioCodes Ltd. (AUDC), and PCTEL, Inc. (PCTI).

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CSCO shares were trading at $48.72 per share on Friday afternoon, down $0.60 (-1.22%). Year-to-date, CSCO has gained 3.08%, versus a 7.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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