Cisco Controlling Costs and Demand Up; Maintain $48 FVE
With Cisco more positive about the demand environment ahead, shares increased over 7% after reporting. We are maintaining our $48 fair value estimate and believe shares are undervalued.
Narrow-moat Cisco Systems (CSCO) surpassed CapIQ consensus expectations, with revenue falling 9% year over year alongside adjusted EPS of $0.76 in the first quarter. Although Cisco is benefiting in certain areas, like an increased need for remote collaboration and cloud security, its core products have been hampered by soft networking infrastructure upgrade demand amid widespread sheltering in place. Nonetheless, we believe that Cisco is turning the corner after a few quarters of declining sales due to the pandemic, and we expect to see improved performance in the second quarter. With Cisco more positive about the demand environment ahead, shares increased over 7% after reporting. We are maintaining our $48 fair value estimate and believe shares are undervalued.
Compared with the prior year, infrastructure platforms declined by 16% and applications shrank by 8% while security grew by 6% and services expanded by 2%. Within infrastructure platforms, switching, routing, data center, and wireless all declined, largely because of weakness in the commercial and enterprise markets. The Catalyst 9k continues to perform well and Wi-Fi 6 products were a highlight in the quarter. Although WebEx had strong growth, unified communications and telepresence endpoints pulled down the results for applications. Security strength was led by cloud security, Duo, and Umbrella offerings. We continue to expect the combination of security and networking to be a key growth engine for Cisco, and for the company's SD-WAN and hyperscale cloud offerings to perform well.
Product orders were down 5% year over year, as enterprise contracted 15%, commercial was down 8%, and service provider shrank by 5%, while the public segment grew by 5%. Total remaining performance obligations grew 10% annually to $27.5 billion. Guidance for the second quarter includes a year-over-year revenue decline of 1% at the midpoint, adjusted operating margin of 32%-33%, and adjusted EPS of $0.74-$0.76.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Mark Cash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.