Stock Pick: Cisco Systems Inc. (CSCO) rises again with cloud computing

Data storage is a growing business

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Trailing 12-month stock chart for Cisco Systems

If you’re looking for a reliable, moneymaking and attractively valued technology company (and really, who wouldn’t want that?) then look no further than San Jose’s Cisco Systems Inc. (NASDAQ: CSCO)

The company designs and manufactures Internet Protocol-based communication and networking tools. If you’re in a large company, look at the phone on your desk—it’s likely it’s a Cisco device.

In 2013, there were some issues that concerned investors—namely weakness in emerging markets and the U.S. federal government, which is a big client. In November, the company had said that it estimated sales falling by 10% in the quarter ending in January.

That announcement surprised analysts and many lowered their estimates for the second quarter. In the end, results came in generally as expected. In Q2—results were announced in February—it posted earnings of 47 cents per share, which actually came in a cent above the analysts’ diminished expectations. The company also raised its dividend by two cents to 19 cents a share.

While this will never be a high-growth tech company, Jeff Kvall, an analyst with Northland Capital Markets, says that the problems that hurt the business are now in the past and we should see steady growth from here.

On April 3, he initiated coverage with a buy rating, and pointed out his report that the emerging markets “downtick” is leveling off, while U.S. enterprise and commercial markets is growing by 10% a year.

Another issue is that the company has  had to deal with industry changes. There’s been a movement towards a new type of computer networking called software-defined networking, which could significantly help competitors eat into Cisco’s market share, but the company has been able to adjust by launching a new networking model—the Application Centric Infrastructure as it’s called—and that will help them stay competitive, says Kvall.

One area it’s doing well in is data storage. Kvall expects this to be a huge growth area as more and more companies start collecting copious amounts of data. He sees 4.5% annual growth in the data centre market.

Overall, the company is still the major player in the networking space. It accounts for about 75% of the $3.5 billion enterprise router market and with new services and packages — it’s now starting to sell services in bundles instead of individually — many analysts think it can stay on top.

Kvell thinks earnings per share will top $2.19 in fiscal year 2015, above the $2.10 consensus estimates and he has a 12-month price target of $28. It’s currently trading at $22.

It’s also got an attractive 3.31% yield, a decent debt-to-capital of 21.5% and a price-earnings ratio of 15 times.

“We expect reversing cyclical trends to drive upside to earnings per share and the multiple for this value play,” he writes.

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