Cisco Systems’ Stock Rises on Upside Earnings Surprise


(CSCO, $24.46, up $1.65 in early trading)

Cisco Systems Inc. reported third quarter revenue of $11.5 billion, down from $12.2 billion a year ago, but not quite as low as the market had expected.  Earnings per share (EPS)  were $0.51 vs. the consensus estimate of $0.48, and equal to $0.51 a year ago.

The company repurchased 90 million shares during the quarter, with $10.1 billion remaining in its repurchase authorization.

I last wrote about Cisco on March 25 when the company announced its entry into the cloud computing business.

Earnings:  Cisco’s EPS are projected to fall 1.5% in 2014, followed by growth of 6% and 8% in 2015 & ’16 (July year-end).

The stock’s 2014 PE is 12.3, and the dividend yield is 3.12%.

In the last couple of years, as it became clear to the market that Cisco’s earnings growth would be challenged for several years on-end, the formerly high PE range fell to 10-14.

The stock is already somewhat overvalued.  But let’s say that the PE rises to 14 this year.  And to be even more generous, let’s use the 2015 consensus EPS figure of $2.11, since Cisco’s 2014 fiscal year ends in July.

$2.11 EPS x 14 PE = $29.54 share price

Again, the stock is already overvalued if you compare the earnings growth rate to the PE.  But it’s not overvalued yet if you want to measure valuation by reasonable expectations within the PE range.

At Goodfellow LLC, the point is moot.  I will not recommend stocks with falling EPS, or with annual EPS growth (plus dividends) that’s much lower than 15%.

Technical chart:  The chart is bullish, having broken through upside resistance at $23.50 this morning.  At this point, I would expect the stock to trade between $23.50-$24.50 for a short while, then continue climbing toward medium-term price resistance around $26.50.

Goodfellow LLC rating: Hold, Public.  (05-15-14)

CSCO Chart

CSCO data by YCharts


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Crista Huff


Goodfellow LLC

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