Shares of Cisco Systems, Inc . ( NASDAQ:CSCO ) have had a strong run since the company reported fourth quarter earnings last week. The stock price has made a new 2-year high, yet interestingly remains 25% below the all-time high which was reached more than 20 years ago during the dotcom bubble.
In recent years Cisco has become known as a slow growing, yet highly profitable company. Over the last 10 years, revenue growth has ranged from -5 to +7%, while operating income growth has fluctuated between -8 and +22%. While this is very pedestrian, Cisco’s operating margin has gradually improved from 23% to 27.6%.
The solid profit margins have allowed Cisco to pay investors a dividend of around 2.5% a year, which is quite rare in the tech sector. Cisco’s total return including dividends over the last 10 years has been slightly higher than the S&P 500, but well below that of the Nasdaq.
What kind of growth will Cisco Systems generate?
As you can see, Cisco’s revenue and earnings are expected to continue growing slowly over the next few years. Cisco’s results last week were better than expected, but the share price initially fell, until the market digested the results and upbeat guidance.
What's the opportunity in Cisco Systems?
Cisco’s share price is now up 33% this year which is a very strong performance for a company with relatively slow revenue growth. The good news is that the stock is still trading at a fairly cheap price. According to our valuation, the intrinsic value for the stock is $93.45, but it is currently trading at US$59.32 on the share market, meaning that there is still an opportunity to buy now.
Cisco Looks Like a Good Defensive Play Now
There isn’t much reason for investors to expect anything more than moderate gains going forward. However, Cisco remains very profitable and pays a decent dividend. As we mentioned recently, Cisco has also managed to reduce its debt load considerably which is another positive. On top of that the share is attractively valued which reduces downside risk.
All of this adds up to make Cisco a defensive, income generating stock, which is rare in the technology sector. If the market does become concerned by valuations and the number of unprofitable companies in the tech sector, Cisco may become a ‘safe haven’ too, which further reduces downside risk.
The current rally appears to be driven by momentum more than anything else, so there may be a pullback and better buying opportunity in the near future.
Diving deeper into the forecasts for Cisco Systems mentioned earlier will help you understand how analysts view the stock going forward. At Simply Wall St, we have the analysts estimates which you can view by clicking here .
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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.