Limited Upside from Cisco (CSCO) After Recent Rally

Cisco Systems (NASDAQ:CSCO) shares soared significantly over the last twelve months, supported by its innovations and the rally in the U.S. stock market. CSCO’s stock price increased more than 9% in the last month alone, extending the twelve-month rally to 31%. Following a recent rally, Cisco’s share price is currently trading around the highest level since 2007.

However, its share price has limited upside potential from its current level considering its negative sales and earnings growth. Although the company has beaten revenue and earnings estimates for the second quarter of FY2017 by $50 million and $0.01 per share, respectively, its sales and earnings declined considerably compared with the same period last year.

Its revenue of $11.6 billion in the second quarter decreased 2%, compared with the revenue of $11.8 billion in the same period last year. Revenue breakdown: Product, $8.49B (down 5.5%); Service, $3.09B (up 4.9%).

“We are pleased with the quarter and the continued customer momentum as we help them drive security, automation and intelligence across the network and into the cloud,” said Chuck Robbins, Cisco CEO.

In addition, the growth in operating expenses and a decline in gross margin significantly impacted its earnings performance in the second quarter of fiscal 2017. In Q2, its operating expenses increased 6% to $4.4 billion over the prior year period. Consequently, its earnings per share declined at a mid-single-digit-rate over the same period last year.

On the positive side, CSCO has increased its quarterly dividend by 3 cents to $0.29 per share. The latest dividend increase represents the management’s confidence in their future fundamentals. Despite the fact that its cash flows are declining due to lower earnings, the dividend payments look complete safe, supported by its strong free cash flows.

Cisco’s share price has very limited upside potential from here considering a muted outlook for the third quarter of FY2017. Its sales are likely to decline in the range of a mid-single digit, while earnings per share could stand around $0.57 compared to $0.59 per share in the same period last year. Thus, capitalizing on the recent gains by selling this stock at the highest level since 2007 could be a wise strategy.

The author has no position in the above mentioned companies.

Alexander is an analyst for who specializes in index and commodity trading. His outlook is usually near-term to medium-term. He has over 10 years of experience in the financial industry and began his career at the dealing desk. Alexander holds a Bachelor’s degree in Economics from University of Delaware.