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Cisco Systems, Inc. (CSCO)’s Growth Should Continue With an Improving Economy

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Cisco Systems, Inc. (NASDAQ:CSCO) reported earnings and showed higher than expected revenue growth. Earnings growth was impressive as well, but it is revenue that has really dogged the company for some time. The perception that the company had a revenue growth issue has kept the stock down. Top line growth has been consistent, but it seemed like the market expected this to stall at some point and Cisco Systems, Inc. (NASDAQ:CSCO) would spin its wheels. The company was priced like it was spinning its wheels already, because perception is a powerful thing.

Cisco Systems, Inc. (NASDAQ:CSCO)

The Cisco situation

The company has been showing revenue growth regularly as mentioned. It has also been growing profit faster than revenue, which is one of the key ways larger companies create value for shareholders. At some point, a company gets so big that growth will be limited in current businesses. New opportunities take time to properly develop, and there can be lulls in top line growth. Personally, the revenue growth at Cisco Systems, Inc. (NASDAQ:CSCO) has impressed me consistently, but the market seemed not to care. Net income growth was just as impressive and in the previous quarter the growth was a great 15%.

The company has had over $45 billion in cash on the balance sheet for a while now. It is edging up with each earnings report, but since I started following it closely, the company has had a ton of cash. Debt has stayed low, though it is somewhat surprising that the company has any debt on the balance sheet considering its growing cash balance and its almost $3 billion in free cash flow.

Despite all these good things, the company has a three-year return of 6% and a one-year return of 51%. The one year is not bad, but the three year is disappointing. During my initial write-up of this article, the three-year return was (8)%. Cisco Systems, Inc. (NASDAQ:CSCO) has been a laggard for a decade, but that seems unwarranted given the strength of the company. It might finally be seeing earnings actually move the stock. Most of those gains were made the day after earnings, and since then, the stock has flattened out again.

Harmed by association

The market tends to associate the results of one company to another company. This might not always be the best thing, especially when the company has clearly shown a divergence, but it is a reality that must be lived with. This happened when Juniper Networks, Inc. (NYSE:JNPR) reported its earnings and missed on revenue. The miss was minor in my opinion, just $10 million out of quarterly revenue over $1 billion, but it was indicative of the growth problems that Juniper is facing. Its revenue has been flatter than Cisco’s.

When I saw the earnings report for Juniper Networks, Inc. (NYSE:JNPR), I thought that it was an issue intrinsic to the company. I did not think it would adversely impact Cisco Systems, Inc. (NASDAQ:CSCO), though I was not expecting some of the regional growth that Cisco was seeing, especially in the United States. Cisco would probably just report revenue in line with some growth, but not enough to turn heads. It did better than that and has finally started making real gains.

When Juniper Networks, Inc. (NYSE:JNPR) reported its “lackluster” earnings, Cisco dipped into the red along with it. Cisco moves so slowly that I want to see consistent green days, but every time Cisco makes some gains, something sends it back down to the $20-$21 area. This is why I closed my calls at the post earnings high for Cisco Systems, Inc. (NASDAQ:CSCO), and am looking for re-entry.

More company specific devastation

Juniper is not in bad shape. It is struggling to find growth, but is not in the recurring loss situation that Alcatel Lucent SA (ADR) (NYSE:ALU) finds itself in. Juniper is still making money, and net income ttm seems on the mend. The new PTX boxes are impressive, but Juniper does need to explore some new lines of business to grow revenue faster.

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