Cisco Systems Is not 'Dead Money'

NEW YORK (TheStreet) -- Whenever a major company that is publicly traded is about to step into the earnings confessional the rumors begin to swirl like a dust devil in the desert.

So, in case you didn't notice the title of this article, which member of the DJI 30, a Dow stock that is down almost 7% year-to-date and currently offers a dividend yield-to-price of 3.3%, reports this Tuesday?

No surprise if you answered Cisco Systems ( CSCO). The "surprise" may be in the numbers they report concerning last quarter's earnings-per-share and revenue numbers. It will reflect their first quarter of fiscal year 2013 earnings through Oct. 27.

Then we'll all be closely listening for some kind of surprise guidance, either up or down, about the quarter ahead. John Chambers, the CEO of CSCO is a market-mover. When he speaks every analyst that's concerned about the economy and the tech sector listens with bated breath. A shareholder meeting is scheduled for Thursday, Nov. 15.

Speaking of confessions, I want to own shares of CSCO so I can collect their tantalizing dividends that as of now represent a payout ratio of just 19 % of the company's earnings. CSCO has levered free cash (over the trailing 12 months) of $9.18 billion, so they can afford to be even more generous to their long-suffering shareholders.

As of July 28 CSCO had operating cash flow of $11.49 billion. Part of the angst about Tuesday's (after the market's close) unveiling of this past quarter's year-over-year earnings growth has to do with the previous quarter's blow-out positive 56% (year-over-year) upside earnings surprise. At least guidance and expectations for the quarter to be announced has been guided downward.

A consensus of 39 analysts who follow CSCO are anticipating earnings of 46 cents per share for the current quarter. This would be 3 cents higher than the same quarter last year. That doesn't appear to be overly optimistic.

Analysts seem to be in near harmony that total quarterly revenue will be around $11.79 billion, representing a quarterly revenue growth (YOY) of a modest 4.6%. Out of the nearly 39 analysts only one has lowered both their quarterly earnings and revenue expectations for the quarter to be reported.

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After the last quarterly earnings release, shares traded as high as $19.73 on Sept. 6. So at Friday's closing price of $16.82, the price-per-share has corrected nearly 15%. On Aug. 15, CEO John Chambers made the following comments about the previous quarter that investors and potential investors may want to keep in mind ahead of this Tuesday's release.

"As a result of our strong performance, continued execution on our plan to deliver profitable growth, and commitment to shareholders, for the full fiscal year, we delivered revenue growth of 7% as well as a record year in revenue and earnings per share," stated Chambers, who is also Cisco's chairman.

"Our strategy -- delivering intelligent networks and technology architectures, built on integrated products, services and software platforms, to fuel our customers' businesses -- is proving the right long-term strategy for our success. There is no question that our industry and our world are evolving quickly and Cisco is squarely at the center of major technology market transitions -- cloud, mobile, visual, virtual and social."

If you haven't done so recently, carefully peruse CSCO's uncomplicated and revealing Web site. It is a transparent look of a company that is slowly reinventing itself to keep up with the fast-changing world of the products and services it creates and sells.

The five-year chart below compares CSCO's share price history with its diluted quarterly year-over-year earnings per share results. It may also suggest that if CSCO meets or beats on revenue and EPS this Tuesday, the share price may follow the trajectory of the quarterly EPS as shown on the chart.

CSCO Chart CSCO data by YCharts

Another interesting fact to keep in mind is that CEO Chambers still owns over 2.623 million shares and Chief Operating Officer Gary Moore owns nearly 1.03 million shares. The Vanguard Group owns approximately 4.37% of CSCO's outstanding shares. That's around 232 million shares and is a stake worth close to $4 billion.

If you're tempted to buy shares ahead of the earnings announcement one strategy you might employ is for every 100 shares you're buying, buy a November put with a $17 strike price that expires by the end of the week. Or play it safe and wait until you've learned the cold, hard facts of the last quarter as well as the guidance for next quarter and the year ahead.

Either way you'll come out OK in the short run and hopefully have a nice total return between now and the end of January 2013. With its current 1.14 PEG ratio (5-year expected) and selling for just 8 times forward earnings, CSCO looks attractively priced.

At the time of publication the author held no positions in any of the companies mentioned.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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