Cisco’s Impressive 4th Quarter Earnings Report

This is a follow up post to the previous post (Cisco Systems Inc. (NASDAQ: CSCO) Undervalued). Before continuing to read this post, I suggest reading the previous post if you haven’t already. The previous post includes some important facts that are not included in this post. If you have any questions/comments, feel free to leave a comment below or contact me. Thank you.


On Wednesday (August 12, 2015), Cisco (NASDAQ: CSCO) reported its first earnings report with Chuck Robbins (CEO of Cisco) at the helm and it was very impressive. For 4th Quarter Fiscal Year 2015 (Q4 FY’15), revenue was $12.8 billion, up 3.9% year-over-year (Y/Y) from $12.4 billion and EPS (GAAP) was $0.45 per share, up 4.7% Y/Y from $0.43. Net income (GAAP) was $2.3 billion, up 3.2% Y/Y from $2.2 billion.

This earnings report concludes Fiscal Year (FY) 2015. Let’s take a look at FY GAAP results. FY’15 revenue grew 4.3% year-over-year to $49.2 billion from $47.1 billion. Net income grew 14.4% to $9 billion from $7.9 billion and EPS grew 17.4% to $1.75 from $1.49.

During FY’15, Cisco continued its commitment to shareholder return – returning $8.3 billion through share buybacks and dividends – 73% of free cash flow. Yet, Cisco has total cash, cash equivalents, and investments of $60.4 billion, up 16.02% Y/Y from $52 billion in Q4 FY’14.

Key Financial Measures
Key Financial Measures – Cash, Debt, OCF

The company has $25.4 billion in debt, 21.26% increase Y/Y. Their operating cash flow increased 14.56% Y/Y to $4.1 billion. I don’t see the current debt as a problem since the company has a strong balance sheet.

Regional Performance:

Americas revenue increased 6.63% Y/Y to $7.8 billion. EMEA (Europe, the Middle East and Africa) was slightly flat at $3.1 billion. APJC (Asia-Pacific, Japan and China) was flat at $1.9 -billion. Both EMEA and APJC revenue was affected by forex (currency) headwinds. With strengthening dollar – which hurts sales revenue aboard – Cisco should be able to offset the headwinds from it because of a strong domestic market. Stronger dollar makes American goods expensive and less competitive overseas, hurting earnings for U.S. companies. Cisco has a very strong domestic market and continues to increase its footsteps.

Geographic Revenue
Geographic Revenue

Guidance: (Not a big fan of guidance)

Cisco expects 2%-4% Y/Y revenue growth and EPS of $0.55-$0.57 for Q1 FY’16, in-line with a consensus for 2.5% growth and EPS of $0.56. While company’s guidance is important, I believe your own guidance for the company is more important.

Segment Performance:

Cisco Segment Performance - Q4 F'15
Cisco Segment Performance – Q4 F’15 – Source: Slide 7

Product revenue grew 4% Y/Y. Out of nine segments, two segments (“Service Provider Video” and “Other Products”) declined Y/Y, but remaining seven segments grew.

Today, Cisco is looking to acquire businesses focusing on wireless software, video delivery, cloud-based security technologies and investments in cyber-security. They are more likely to acquire smaller companies with strong presence in areas (product and geography) that Cisco itself does not have. The company plans to invest $1 billion into the United Kingdom over the next 3-5 years to boost the country’s technology sector, especially Internet of Things (IoT). During the Q4 FY’15 Conference call, Kelly Kramer, Chief Financial Officer (CFO) stated that Cisco was “…committed to looking at the right acquisitions at the right price to drive our growth strategy.” I’m currently looking into companies that I believe Cisco should acquire (post to come regarding it, if I find a suitable company).

Key Financials:

Key Financials (Q4 FY'10 - Q4 FY'15)
Key Financials (Q4 FY’10 – Q4 FY’15)

In the “Key Financials” chart above, you see “EBITDA” and “EBIT”. Let me take a moment to explain what they are and why they are important.

EBITDA: An acronym for “Earnings Before Interest, Taxes, and DD&A (Depreciation, Depletion and Amortization)”. It’s an income statement metric which represents earnings prior to the payment of interest expense, taxes, depreciation, depletion and amortization. EBITDA is a proxy for (but not a substitute for) cash flow generated by the assets of a company (In this case, Cisco) before debt holders and tax authorities are paid. A good EBITDA growth rate can show investors that the company has a future for potential growth.

EBIT: An acronym for “Earnings Before Interest and Taxes”. EBIT is similar to EBITDA, but It’s an income statement metric which represents earnings prior to the payment of interest expense and taxes.


5-Year CAGR (Compounded Annual Growth Rate):

  • Total Revenue: 4.19%
  • Gross Profit: 2.86%
  • EBITDA: 4.14%
  • EBIT: 3.57%
  • Net Income: 2.95%

While 5-Year CAGR numbers may look small, it’s very reasonable for a company of Cisco’s size.

I love the valuation at current levels. My target price is $32, unchanged from previous post. I’m taking “Warren Buffett” style approach on Cisco. I’m in this for a longer-term and my target price will change as time goes on. Strategic acquisitions, for example, will increase my target price because in the longer-term, the acquired company (depending on the company) will bring in more income although there will be costs in a short-term. After all, it’s the opportunity cost.

Any pullbacks in the stock price will be taken as an opportunity to buy more shares. The only con are the brokerage fees that comes as a disadvantage to small investors like myself.

If you have been wondering why non-GAAP numbers are not listed here, it’s because I don’t look at them much. Companies can do whatever they want to do with it and it’s hard to trust the non-GAAP numbers. On Cisco’s financial reports, they state “These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.”

Non-GAAP is a propaganda tool to raise capital and/or stock price (AKA equity compensation).

I’m not saying I don’t look at non-GAAP numbers, but GAAP is much more important to look at. Exceptions to look at non-GAAP are when there are such reasonable large write-downs and/or restructuring charges (one-time, non-recurring” expenses). Reasonable.

All comments welcomed.


Disclosure: I’m currently long on the stock, CSCO. I went long last year at price just below $25. I will continue to be long.

Note: All information I used here such as revenue, income, etc are found from Cisco’s official investor relations site, Bloomberg terminal, FactSet, and S&P Capital IQ. The pictures you see here are my own (except “Cisco Segment Performance – Q4 F’15”).

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

GE’s massive makeover

Last Friday (April 10, 2015), General Electric (GE) announced a plan to sell off real estate and reduce the size of their financial business. They will be selling majority of GE Capital Real Estate assets for about $26.5 billion. GE will also sell away the remaining portion of GE Capital. It aims to complete the sale of GE Capital over the next two years.

GE’s financial unit is one of the largest financial entities, with assets of half a trillion dollars. It includes everything from consumer loans to property. When the financial crisis hit, earnings from GE’s finance unit collapsed. There were (still is) strict regulations on financial services. As a result, Jeff Immelt, CEO of GE, promised to shrink the finance arm.

Ever since the financial crisis, G.E. has taken small steps to shrink its finance operations. Last year, it spun off its private-label credit card business, known as Synchrony Financial (Ticket: SYF), for $2.9 billion initial public offering (IPO).

To who? GE said it would sell nearly all of its real estate portfolio to investors including Blackstone Group and Wells Fargo & Co for $26.5 billion. There are a further $165 billion of assets that needs to be sold. There will be buyers other than Blackstone Group and Wells Fargo & Co. The company plans to keep the finance assets directly related to selling its products such as jet engines, medical equipment, and electrical grid gear. Remember; Warren Buffett has a stake in both GE and Well Fargo. I believe Warren Buffett will be increasing his stake in GE.

Why now? GE is selling their real estate and financial business for two reasons. First, commercial real estate prices are up. Commercial real estate prices are higher today than it was before the financial crisis. Lastly, rates are still low. If the Fed hikes interest rates (cost of borrowing rises), it will be unattractive to finance any deal. Therefore, it’s a perfect time to take an advantage of the low rates and the high prices.

Source: http://www.greenstreetadvisors.com/about/page/cppi/
Source:       http://www.greenstreetadvisors.com/about/page/cppi/

GE is taking the right move, by focusing more on industrial sector. By beginning to sell $26.5 billion worth of real estate assets, GE will be returning to a kind of company it is supposed to be, an industrial company. GE’s operations include jet engines, oil drilling equipment and medical devices. I would not be surprised if GE makes industrial acquisitions, both small and big. I would not even be surprised if GE merges with another industrial business.

Investors are very happy with the deal, including me. General Electric’s stock (Ticker: GE) rose more than 10%, on a heavy volume, to $28.68, highest since September 2008. On Friday, more than 350 million shares (GE) were traded. GE expects to return more than $90 billion in cash to investors through dividends, share buybacks and the Synchrony exchange through the end of 2018. $50 billion will come from a share repurchase program, one of the biggest on record. As of January 31, GE had 10.06 billion shares outstanding. GE expects to reduce it by 20% to 8-8.5 billion by 2018. In the longer term, the stock price will continue to increase.

GE (General Electric) - Daily
GE (General Electric) – Daily

Not only GE wins here, but also Uncle Sam. GE will bring back $36 billion in cash that resides overseas and will have to pay tax to the U.S government, ranging from $4 billion to $6 billion.

GE said it would take after-tax charges of about $16 billion for the restructuring in the first quarter, with $12 billion being non-cash charges. It will reduce their Earnings Per Share (EPS). On Friday (April 17, 2015), GE will report their first quarter earnings.

GE expects that by 2018 more than 90% of its earnings will be generated by its industrial businesses, up from 58% in 2014.

Past & Future:

GE's past and future
GE’s past and future (source: http://www.ge.com)

 

 Note: I currently own shares in GE, which I brought last year at $25.83. I plan to hold on to it. I may even buy more shares. I believe GE’s share-price will reach $38 by the first half of 2016.

If you have any questions, feel free to contact me, and/or leave comments. Thank you.

UPDATE: Click http://www.outofwacc.com/ges-slight-positive-earnings-report-and-its-about-to-change/ or click here.

Kraft and Heinz to merge backed by Warren Buffett and 3G Capital

Last Wednesday (March 25, 2015), it was announced that Kraft Foods Group and H.J Heinz would merge in a deal backed by Warren Buffett and 3G Capital. The deal is expected to be valued above $45 billion and it is expected to become final on June 30.  3G Capital, a Brazilian investment and management group combined with Berkshire Hathaway in 2013 to buy Heinz for $28 billion.

The merger will create the world’s fifth-biggest food and beverage company. The new company will be called “The Kraft Heinz Co.”. The new company will have revenues of approximately of $28 billion. It will have over 45,000 employees. Kraft shareholders are very happy because they will receive a special cash dividend of $16.50 per share and stock representing 49% of the new company. Existing Heinz shareholders will own 51%. Berkshire Hathaway and 3G Capital will invest $10 billion to fund the special dividend. The new company’s enterprise value is around $110 billion.

As Warren Buffett always buys businesses that he understands, he clearly understand the food industry. Plus, the food industry is a “need” for all of us, in order to survive.  Following the announcement of the deal, Buffett mentioned in a CNBC that that he plans to own Kraft and Heinz “forever”. Berkshire Hathaway is going to be the largest shareholder of the new company.  Berkshire Hathaway will own over 320 million shares of the new company. Kraft’s (KRFT) outstanding shares will increase after the deal.

Consumer packaged goods are very competitive world. Customers, including me are price sensitive. Kraft has $18 billion in annual sales and Heinz has $11 billion in annual sales. The merger will give the new company the advantage over the competitors. Kraft’s majority of sales are in the United States. Heinz’s majority of sales are outside the United States. The deal will help increase Kraft’s sales by using Heinz’s international resources. Kraft will be able to open new markets aboard for Kraft, increasing Kraft’s revenue.

On CNBC, Buffett said that Berkshire would stay invested in Kraft Heinz “forever” and that he views their food brands as enduring. Berkshire will own about 320 million shares of the combined company’s 1.2 billion shares. Their per-share value will be determined by the stock market when they are issued.

Remember that deal has to be approved by Kraft shareholders and federal regulators, before it becomes final. I strongly believe Kraft shareholders will approve this deal because Kraft (KRFT) shares rose after the announcement. I’m not sure about federal regulators. Federal regulators might look this at a “monopoly” and not approve the deal because it reduces the competition.

Investors loved the deal. Kraft’s shares (KRFT) rose about 36% on a heavy volume. It’s currently around $89. I would not buy the stock at this time because it’s little bit expensive and the deal is not final yet.

 

Kraft (KRFT) - Daily
Kraft (KRFT) – Daily