CISCO, Daily
Technology companies have positioned themselves as a clear power in the market with our current ways of living and working, becoming essential to many in their everyday life. They have also become more profitable and this has been reflected within the Stock market that has undergone a fundamental change in recent years, represented by a fairly dynamic increase that has been incorporated into different sectors of the economy, making the technology sector one of the largest contributors of profits.
During a year as volatile as 2020 has been, even the much lauded technology sector has seen a decrease of -1.4% for the sector overall, although compared to the financial sector, which is down by -23.6%, it is doing ok. However, third quarter results showed 87.1% of technology companies beating estimates. Companies such as Apple, Microsoft, Alphabet, Amazon and Facebook increased their profits by 11.6%, surpassing last year’s EPS estimates by 96.6%. Therefore, it is estimated that the total profits of the technology sector will increase by 10% with a +7.7% increase in income for the quarter as a whole.
Another of the technology companies that stands out in the market is Cisco Systems, Inc (CSCO). They work in the design, manufacture and sale of products and services of networks based on Internet protocols related not only to the information technology industry but also communications around the world. For the quarter ended in July of this year, it reported that its gross income decreased 9.5% year-on-year to $12.15 million and non- GAAP earnings per share for the quarter were $0.8, decreasing 4% year after year. This is perhaps because during the coronavirus pandemic, companies have reduced spending on hardware data networks, causing the stock to lose 19% during the current year, creating a decrease in demand from consumers, rating CSCO as a SELL.
For its part, Wall Street will seek a positive view of CSCO while waiting for its next earnings report on November 11, 2020, when they expect the company to report EPS of $0.71, 15.48% less than the previous quarter, as it is also estimating around $11.88 billion in revenue, 9.74% less than the previous year; however a powerful factor that could affect stock prices in the short term is how actual results compare to these estimates.
The company sales of routers, switches, software and services has kept the EPS estimate unchanged for the last 30 days. This is primarily a reflection of how analysts have collectively reassessed their initial estimates during the above-mentioned period; investors should keep in mind the possibility that the direction of each analyst’s estimate revisions may not always be reflected in the aggregate change.
On the other hand, the increasing return on capital employed (ROCE) together with a growing capital employed base shows that CSCO is a capitalization machine, capable of continuously regenerating its profits in the business and generating higher returns. Their figures show that in the last five years, the return on capital has grown 62%, a favourable trend since it shows that the company is earning more for every dollar of capital employed, using 23% less than five years ago, indicating improved efficiency as a business by reducing its asset base.
It is possible that the performance of the first fiscal quarter of CSCO is reflected by the strong momentum in Webex Meetings, Webex Devices and Webex Teams, from increased work from home and demand for telehealth services. While the company updates its Webex portfolio on a monthly basis to help users improve productivity with advancements in video conferencing, the integration of capabilities is expected to have reinforced engagement and driven adoption that will be reflected in the upcoming results.
While CSCO has previously managed to increase its return on equity while reducing its capital base, the company is currently trading below two key moving averages, the 50-day at $39.13 and the 200-day at $42.68 respectively, indicating that the stock is in a downward trend, supported by the loss of 20.6% of the share in the last three months. Another important factor has been the recent sanction of a payment of 41.9 billion dollars to Centripetal Networks. Inc. for patent infringement, as CSCO has used nine of its products on security features on its network.
Shares of CSCO traded at $38.75 per share on Monday morning, up $1.22 (+3.25%). So far this year, CSCO is down -16.43% versus a 13.19% rise in the benchmark over the same period.
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Aldo Weidner Z.
Market Analyst – HF Educational Office – LATAM
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