Here's Why You Buy Cisco Ahead of Earnings

Cisco Systems (CSCO)  shares are undervalued. At around $23, they are near 52-week lows. Investors who are looking for a beaten-down market leader that pays a solid dividend can do well here.

The company reports second-quarter fiscal 2016 earnings Wednesday. For the quarter that ended in December, analysts expect earnings of 54 cents a share on revenue of $11.76 billion. In the year-ago quarter earnings were 53 cents a share on $11.94 billion in revenue. For the full year ending in July, earnings are projected to climb 2.7% year over year to $2.27 a share, while revenue of $49.15 billion is expected to be flat from the year-ago period.

The San Jose, Calif.-based networking specialist has seen its stock lose some 16% so far in 2016, adding to more than 20% declines in the past three months and trailing the S&P 500 (SPX) index during both spans. This is puzzling because the company, which has beaten Wall Street's earning estimates in 12 straight quarters, has done nothing but execute on its stated objectives.

TheStreet's Jim Cramer is a big fan of this Action Alerts PLUS holding. Cramer and Research Director Jack Mohr said Cisco's recent $1.4 billion deal to buy Jasper Technologies gives it an even bigger leg up in the Internet of Things space.

"We ultimately believe the acquisition and the overall long-term strategy are both being undervalued by the market," they said. "Cisco is investing in high-growth areas that should pay off in the future, and we have confidence in the management team to execute on the strategy."

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The stock is priced a price to earnings multiple of 12, which is nine points below the S&P 500 index. On a forward-looking basis, factoring in projected 2016 earnings of $2.39 a share, Cisco's P/E drops to nine, or eight points below the S&P 500 index. This means if Cisco stock was priced on par with the rest of the market shares would be valued today at around $41.

In other words, the market assumes little to no growth for the world's largest networking company and market share leader in devices that powers the internet. But investors who buy now will see little to no risk. Cisco's strong 21-cent quarterly dividend with an annual yield of 3.5% annually -- 1.5 percentage points higher than the S&P 500 index -- pays you to hold on.

The stock has a consensus buy rating and an average 12-month price target of $30.50, or almost $8 higher than where the stock trades today. If the shares were to reach their high analyst target of $37 the implied premium climbs above 60%.

Remember, Cisco doesn't have to deliver breathtaking stock gains for investors to profit. Nor does the stock have to reach a new 52-week high as the price targets suggest. Assuming its stock reaches, say, $28 in the next 12 months, this would yield a 20% return. And $28 would still be some 8% shy of the stock's 52-week high of $30.31, underscoring how punished the shares have been.

In short, with a net cash position of roughly $34 billion, Cisco has tons of ways to return cash to shareholders in 2016 via buybacks and higher dividends, making its stock an attractive and safe long-term investment.

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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