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Stock Analyst Update

Cisco Impresses, Shares Slightly Rich

The narrow-moat firm's largest advantage may be its ability to sell an entire networking solution whereas competitors can only offer partial solutions.


 Cisco's (CSCO) record-setting fourth quarter closed out a strong 2018 fiscal year as both revenue and operating income for the quarter came in slightly ahead of consensus expectations. Cisco reported 6% year-over-year revenue growth in the quarter, and 3% growth for the fiscal year. We are maintaining our narrow moat and are raising our fair value estimate to $43 per share from $41 due to rolling our model. With shares trading in 3-star territory, investors should wait for a larger margin of safety.

The company posted double-digit annual growth within its applications and security segments and in line with our projections. An unexpected positive was the 7% revenue gain within infrastructure systems, Cisco's largest operating segment. The company is benefiting from enterprises desiring a unified networking experience between on-premises, private and public clouds. Cisco's strategic focus of providing software, with analytics and security focused on cloud environments, is supplementing its industry-leading hardware. Customers find value in Cisco's ability to simplify the potential complexities in multi-cloud networking environments. Commodity components caused Cisco gross margins to decrease by 100 basis points to 62% for fiscal 2018 while operating margins declined to 25.7% from 26.5% due to increased operating expenses as Cisco invests in new product platforms.

The company's guidance of a 5%-7% year-over-year revenue increase for next quarter was higher than expected and drove the stock up 6% afterhours. We believe that Cisco will continue to repurchase shares while also increasing its dividend to $1.40 per share in fiscal 2019. Cisco is growing its main business units in a competitive environment, and we reiterate our thesis that Cisco's largest advantages may be its ability to sell an entire networking solution whereas competitors can only offer partial solutions.

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