Cisco: 'Show-me stock gets religion'

by Chuck Carlson, editor The DRIP Investor

Cisco Systems (CSCO) hasn’t exactly been a well-loved stock over the last three years. The stock was the second-worst performer in the Dow in 2010, and among the top 10 worst in 2011.

But history is filled with examples of Dow stocks that performed poorly for a year or two that rebounded strongly the next year, and Cisco -- a leader in networking products -- seems to be on that track.

Indeed, the stock has risen 10% so far in 2012, handily outperforming the Dow, and I believe there is plenty more upside to come.

The line has been rebounding of late. Cisco has beaten the consensus earnings estimate in each of the last four quarters. For fiscal 2012 ending in July, the consensus estimate is $1.84 per share, up from $1.62 in fiscal 2011.

For fiscal 2013, analysts are looking for per-share profits of $1.98. I think the consensus estimates for this year and next are a bit conservative.

Cisco currently trades at less than 11 times fiscal 2012 earnings estimate and 10 times fi scal 2013 estimates. That seems like a good value given the company’s growth prospects.

Higher profits, coupled with the company’s cash-heavy balance sheet, should keep dividends growing. The payout increased 33% earlier this year, and double-digit dividend hikes are expected on an annual basis.

Cisco had seemingly lost its way a bit in recent years. Ill-fated acquisitions (remember the Flip camera?) and a sluggish bottom line had not done much to endear the company with investors.

FUrther, there was a perception that perhaps the firm had gotten too big and too stodgy to operate successfully in today’s fast-changing technology markets.

However, I think Cisco has “gotten religion” again, and that renewed focus on its most profitable areas, as well as an attention to costs, should serve the stock price and shareholders well going forward.

To be sure, Cisco remains sort of a “show-me” stock with Wall Street, but I think the shares will garner additional investor support as quarterly earnings continue to beat expectations.

Enhancing appeal is the stock’s not-too-shabby yield of 1.6%, and dividend growth should be ample over the next several years given the cash-heavy balance sheet — cash and investments totaled more than $50 billion at the end of January — and company’s earnings prospects.

The stock is a “Buy” at current prices. Please note that Cisco offers a direct-purchase plan in which any investor may buy the first share and every share directly.

Learn more about this financial newsletter at Chuck Carlson's The DRIP Investor.

Related articles:

• Google: A new TV experience?
• Qualcomm: Short-sighted opportunity
• Intel: 'At the heart of the PC revolution'