Why Cisco Is a Buy Ahead of Earnings

Cisco Systems (CSCO) continues to be the gift that keeps on giving. The shares, which now trade at a 52-week highs, have risen almost 40% from around $22 to $31 since I recommended the stock as a buy on Feb. 9.

On May 17, with CSCO trading at around $26, the charts pointed to higher gains. The result has been a profit of almost 20%. Cisco shares have rewarded investors not only from the company's improved revenue and earnings, its profit metrics continue to strengthen, suggesting Cisco is gaining pricing power as it gains market share.

The San Jose, Calif.-based networking specialist will report fiscal 2016 fourth-quarter earnings after the closing bell Wednesday. The stock is a holding in Jim Cramer's Action Alerts PLUS portfolio.

In a recent note, Cramer and co-manager Jack Mohr said that when it comes to Cisco earnings they "will be looking for an update on the company's ongoing shift toward a subscription-type model, focusing on deferred revenue, fueling growth in its Cloud, Collaboration and Security businesses. We recognize that the Switching & Routing business continues to face competitive headwinds, so we will be listening for management's commentary on the direction moving forward. We also will be eagerly awaiting management's thoughts on recent and future M&A."

Cisco is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells CSCO? Learn more now.

In the third quarter, not only did Cisco's gross margin of 65.2% beat the company's own guidance, it climbed 100 basis points from the first quarter and 60 basis points year over year. Why is that important? Beyond helping Cisco extent its streak of earnings beats to 13 quarters, the strong margins will help drive Cisco cash, which now stands at $63.5 billion. That cash will allow Cisco to buy back millions of its own shares and pay future dividends.

Despite the stock's dominant performance, Cisco still offers tons of value for investors who are willing to hold it for the long term. The shares, which are up about 15% year to date and 7% over the past 12 months, are still priced attractively at a forward price to earnings multiple of 12, which is five points below the S&P 500 (SPX) .

This means if CSCO was priced on par with the rest of the market, it would be valued today at around $41, above Monday's close of $31. This suggests the stock is not as risky as some of the tech names that are trading at 52-week highs. What's more, Cisco pays a 26 cents per share quarterly dividend that yields 3.37% annually, which is 1.37 percentage points above the 2.00% average yield paid out by S&P 500 companies.

In short, while Cisco has outperformed both the 7.15% rise in the S&P 500 index and the 8% rise in the iShares North American Tech-Software ETF (IGV) , you would be hard-pressed to find a better value large-cap on the market that pays a yield that's just as attractive as Cisco.

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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