CSCO: Gauge Analysis (updated February 28, 2021)

I have analyzed Cisco Systems's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Founded in 1984, Cisco sells products and services for connecting devices via the Internet.  The company's products are categorized as infrastructure platforms (switches, routers, wireless items, and the data center products); applications (teleconferencing and communications), and security.  Services are a separate category makes products related to the following technologies: software-defined wide area networks, cloud computing, 5G and WiFi-6, optical networking, next generation silicon, and artificial intelligence.  A frequent acquirer of other companies, Cisco expects it will soon complete the $4.5 billion acquisition of Acacia Communications, Inc., a company that sells high-speed coherent optical interconnect products.

Cisco recorded profits of $10 billion, $2.39 per share, on revenue of $48 billion during the last four quarters.  In the quarter that ended on January 23, 2021, Cisco earned $0.60 per share on a GAAP basis and $0.79 after non-GAAP adjustments and exclusions.  See Cisco's most recent quarterly report (https://tinyurl.com/y53k9r4x) and my review of their results relative to expectations (https://tinyurl.com/y87amk4d) for additional information.

Shares of Cisco now trade for about $45 each, giving the company a market value of $190 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Analysis Results:

Cisco's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments.

1. The Company's Size is Substantial: GREEN

    Market Value: $190.0 billion (mega-cap)

2. The Company is Conservatively Financed: GREEN

    Current ratio = 1.6 (>2.0 is conservative)

    Long-term debt/Working Capital = 57% (<150% is conservative)

3. The Company Generates Stable Earnings: YELLOW

    Nineteen positive quarterly earnings reports in last 5 years (almost perfect)

    Earnings variability = 55% (very high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = -10% (poor)

    Owner Earnings growth rate (five-year average) = 33% (very good)

    Free Cash Flow growth rate (trailing year) = -3% (poor)

    Free Cash Flow growth rate (five-year average) = 4% (weak)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 29% (very good)

    Operating Profit/Sales = 28.5% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 9% (fair)

    Dividend = 42% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 17.5 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 24.1 (high)

    Free Cash Flow/Market Value = 7.6% (appealing, more than the five-year average of 7.4%)

    Acquirer's Multiple = 12.7 (reasonable)

    Price/Book Value = 4.9 (more expensive than the five-year average of 4.3)

    Price/Sales = 4.0 (about the same as its five-year average)

In summary, the analysis assigned Cisco Systems four GREEN, two YELLOW, and one RED grades.  The resulting Overall Score is 54 of the 100 possible points, which is not high enough.  The score is below the 60-point GCFR threshold, and, therefore, Cisco does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 9.5 percent, from $44.87 to $40.59, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Cisco's future results will push the score up (or pull it down).  Revisit GCFR2 (https://gcfr2.com) occasionally for updates on Cisco's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

---------------

 #cisco    #csco    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

CSCO: Earnings Report for the Quarter Ending January 23, 2021

Cisco Systems reported after the market closed on February 9, 2021, it earned $0.60 per diluted share in the quarter that ended on January 23, 2021, down 12 percent from earnings of $0.68 in the equivalent 13 weeks of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Non-GAAP earnings rose 3 percent to $0.79 per share from $0.77 one year earlier, a much better change than the GAAP percentage. The most significant exclusions contributing to the $0.19 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Stock-based compensation [$0.10 per share], Acquisition-related expenses [$0.06 per share], and Asset impairments and restructurings [$0.06 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's primary, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by Cisco to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Cisco's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  Founded in 1984, Cisco is a leading seller of products, such as routers and switches, and related services, for connecting devices via the Internet.  The company makes products related to the following technologies: software-defined wide area networks, cloud computing, 5G and WiFi-6, optical networking, next generation silicon, and artificial intelligence.  A frequent acquirer of other companies, Cisco expects it will soon complete the $4.5 billion acquisition of Acacia Communications, Inc., a company that sells high-speed coherent optical interconnect products.

The following table is a simplified version of Cisco's Income Statement for the quarter that ended in January 2021, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the January 2021 quarter totaled $12.0 billion, about the same as last year.  The Infrastructure Platforms business was responsible for 53 percent of overall revenue, and this unit's revenue percent fell by 3.0 percent compared to the year-earlier result.  The Applications business contributed 11 percent of revenue, and this unit's revenue was essentially unchanged percent.  The Services unit supplied 28 percent of revenue, and this business's revenue rose by 2.0 percent.

I was expecting Cisco to report revenue of $11.9 billion for the January 2021 quarter.  The actual amount surpassed my estimate by $60.0 million (0.5 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $4.2 billion in the latest quarter, which translates into a Gross Margin of 65.1 percent of revenue. Since it was higher than the 64.7 percent Gross Margin achieved in the year-earlier quarter, it signifies that Cisco sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 62.5 percent in the January 2021 quarter, and Cisco exceeded that prediction by 2.6 percent.

Cisco spent $1.5 billion on Research and Development in the latest quarter, down from $1.6 billion one year ago. I had estimated that R&D expenses would be $1.6 billion.  R&D was 12.8 percent of Revenue.

Sales, General, and Administrative expenses totaled $2.8 billion in the January 2021 quarter, up 1.0 percent from one year ago.  SG&A expenses increased from 22.8 percent to 23.1 percent of quarterly revenue, which shows Cisco spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 21.8 percent of revenue, and the actual percentage turned out to be higher than the prediction.

The last operating expense line on the Income Statement is where the sum of other operating income and charges, such as restructuring, may be listed.  For Cisco the amount listed on this line was a $273 million loss in the latest quarter.  I was expecting a net loss of $200 million.

Cisco's Operating Income was $3.2 billion in the quarter, down 4.6 percent from the year-earlier period.  Operating Income exceeded my $3.0 billion estimate by $185 million.

Interest and other non-operating items summed to a net income of $32 million.  My estimate for non-operating items was $80 million.

The effective income tax rate rose by 3.3 percent to 21.8 percent, which had a negative effect on net income.  I expected the tax rate to be 19.0 percent.

Net income attributable to Cisco was $2.5 billion, $0.60 per share in the quarter ending January 2021.  The figures for the year-earlier quarter were $2.9 billion, $0.68/share. My earnings estimate for  the latest quarter was $2.5 billion ($0.60/share), so Cisco Systems earned the $0.60 I had predicted.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  Gross Margin 

      – Worse than expected:  SG&A + SG&A/Revenue + Special operating items + Misc non-operating items + Interest + Income tax rate 

      – Near expectations:  Revenue growth + R&D 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #cisco    #csco    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

CSCO: Look Ahead to January 2021 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Cisco's earnings for fiscal year 2021's second quarter, which ended on January 23, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on February 9, 2021, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Cisco Systems.

Founded in 1984, Cisco is a leading seller of products, such as routers and switches, and related services, for connecting devices via the Internet.  The company makes products related to the following technologies: software-defined wide area networks, cloud computing, 5G and WiFi-6, optical networking, next generation silicon, and artificial intelligence.  A frequent acquirer of other companies, Cisco expects it will soon complete the $4.5 billion acquisition of Acacia Communications, Inc., a company that sells high-speed coherent optical interconnect products.

Shares of Cisco now trade for about $48 each, giving the company a market value of $200 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Cisco recorded profits of $10 billion on revenue of $48 billion during the last year. In the quarter that ended on October 24, 2020, Cisco earned $0.76 per share (excluding certain items), which beat the $0.70 Wall Street consensus forecast. 

Revenue in the October 2020 quarter totaled $11.9 billion, 9 percent less than last year.  The Infrastructure Platforms business was responsible for 53 percent of overall revenue, and this unit's revenue percent fell by 16.0 percent compared to the year-earlier result.  The Applications business contributed 12 percent of revenue, and this unit's revenue decreased by 8.0 percent.  The Services unit supplied 28 percent of revenue, and this business's revenue rose by 2.0 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

When Cisco reported its results for the October 2020 quarter, it also provided the following guidance the January 2021 period:

Guidance for Q2 FY 2021

Cisco expects to achieve the following results for the second quarter of fiscal 2021:

 

Q2 FY 2021
Revenue		0% - (2)% decline Y/Y
Non-GAAP gross margin rate		64% - 65%
Non-GAAP operating margin rate		32% - 33%
Non-GAAP tax provision rate		19%
Non-GAAP EPS		$0.74 - $0.76

Cisco estimates that GAAP EPS will be $0.55 to $0.60 in the second quarter of fiscal 2021.

Cisco reported Revenue of $12.0 billion in the quarter that ended January 25, 2020 (i.e., one year ago).  Assuming a minus-2 to 0 percent change, per the guidance, leads to a Revenue estimate for the January 2021 quarter between $11.75 billion and $12.0 billion.  I made $11.9 billion, just over the midpoint of this range, as my estimate.

For the Gross Margin, Cisco indicated that this ratio would be, on a GAAP basis, between 62 and 63 percent.  Using the 62.5 percent midpoint, the estimate for the Cost of Goods Sold = 37.5 percent of Revenue, or 0.375 * $11.9 billion = $4.5 billion

The Operating Margin listed in the guidance refers to operating income as a percentage of revenue.  A 25-percent GAAP margin with the $11.9 billion revenue estimate indicates that operating income should be about 0.25 * $11.9 billion = $3.0 billion and that operating costs would, therefore, total $11.9 billion - $3.0 billion = $8.9 billion.  This latter figure includes the Cost of Goods Sold, estimated at $4.5 billion, so there would be $8.9 billion - $4.5 billion = $4.4 billion to cover Research and Development (R&D), Sales, General, and Administrative (SG&A), and other operating expenses.  I've allocated this amount as $1.6 billion for R&D, $2.6 billion for SG&A, and $200 million for other.

For non-operating items, I've assumed a $20 million gain and $60 million net interest income.

The guidance indicates that an effective income tax rate of 19 percent is expected.

With these assumptions, my estimate for Net Income is $2.5 billion ($0.60 per share), which is at top end of the guidance range.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#cisco  #csco  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

Cisco Systems: Earnings Report for the Quarter Ending October 24, 2020

Cisco Systems reported (https://tinyurl.com/y5fbct88) after the market closed on 12 November 2020 it earned $0.51 per diluted share in the quarter that ended on 24 October 2020, down 25% percent from earnings of $0.68 in the equivalent 13 weeks of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Founded in 1984, Cisco is a leading seller of products, such as routers and switches, and related services, for connecting devices via the Internet.  The company makes products related to the following technologies: software-defined wide area networks, cloud computing, 5G and WiFi-6, optical networking, next generation silicon, and artificial intelligence.  A frequent acquirer of other companies, Cisco is working to complete the pending purchase of Acacia Communications, Inc., a company that sells high-speed coherent optical interconnect products, for about $2.6 billion.

Non-GAAP earnings fell 10% to $0.76 per share from $0.84 one year earlier, a percent change decline not as steep as seen with the GAAP figures. Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.

The principal exclusions contributing to the $0.25 per share difference in the latest quarter between GAAP earnings and Non-GAAP earnings were: Stock-based compensation [$0.09 per share], Acquisition-related expenses [$0.06 per share], and Asset impairments and restructurings [$0.13 per share].

Non-GAAP earnings of $0.76 per share in the latest quarter beat the $0.70 average ("consensus") of estimates made by Wall Street analysts. See https://tinyurl.com/wjr3ob2 for Cisco's earnings record and forecasts.

Stock market traders reacted positively to Cisco exceeding expectations. The price of the company's shares rose 8.5% during after-hours trading following the report.

Looking deeper into the GAAP results, "top-line" revenue in the October 2020 quarter totaled $11.9 billion, 9% less than last year's $13.2 billion. The Infrastructure Platforms business was responsible for 53% of overall revenue, and this unit's revenue fell by 16.0% compared to the year-earlier result. The Applications business contributed 12% of revenue, and this unit's revenue fell by 8.0%. The Services unit supplied 28% of revenue, and the amount grew by 2.0%.

The gross margin weakened from 64.3% of revenue to 63.6%, a sign that Cisco sold its output and services at less profitable prices relative to production costs. Sales, general, and administrative expenses increased from 22.8% to 23.1% of quarterly revenue, which shows the company spent more per dollar of sales on other operational costs, such as marketing. The effective income tax rate fell by 1.7% to 18.9%, which had a positive effect on net income.

Cisco's operating activities generated $4.1 billion in cash during the last quarter, up 14.2% from $3.6 billion in the year-earlier period. The cash flow delta was, therefore, much better than the change in earnings. Notable uses for cash included $1.5 billion to pay dividends to shareholders, $898 million for corporate acquisitions, $800 million to buy back the company's common shares, and $171 million to acquire property, plant and capital equipment. 

Free cash flow over the last 12 months totaled $15.2 billion, or $3.58 per share using the latest share count. At the current market price per share of $38.67, this translates into a very attractive Free Cash Flow Yield of 9.3%.

The accompanying charts illustrate several trends in Cisco Systems's financial results, taken from data in regulatory filings. The text and the charts are intended to provide some limited historical context for readers interested in the company’s finances. No investment advice is provided, and no investment offer of any kind is made or solicited. The accuracy of the information presented is not guaranteed, and readers are encouraged to independently verify all data.

 #cisco    #csco    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis