Juniper Networks, Inc. (JNPR) & Cisco Systems, Inc. (CSCO)’s Clear Dominance in Data Networking

Given Cisco’s extensive product portfolio and broad reach into enterprises’ and service providers’ IT environments, I like management’s strategy of increasing its service capabilities, product integration, and software revenue. Services has been an area of strength for the company over the past five years, with double-digit annual service revenue growth in 22 of the past 27 quarters and no year-over-year declines over the same period. Also, service gross margins have recently pushed into the mid- to upper 60s, above the corporate average. Current go-to-market vehicles such as CloudVerse and Vblock demonstrate Cisco’s ongoing efforts to deliver integrated products and services.

Positive Points

• The long-term demand outlook for carrier routers remains solid as voice, video, and data networks converge toward IP. As Internet traffic grows (by 50% or more per year, according to most estimates), demand for Cisco’s networking gear will grow.
• Cisco’s share of the Ethernet switch market has held relatively steady in recent years despite increasing competition from Hewlett-Packard Company (NYSE:HPQ), Brocade, and Juniper. The status quo is still the first option for mission-critical switch installations.
• With almost $6 per share in net cash, $1.80 per share in normalized free cash flow, and a 3% dividend yield, downside risk is limited at current levels.
• Management has committed to return 50% of free cash flow to shareholders annually. The annual dividend of $0.68 per share could easily grow 10% per year over the next five years without limiting Cisco’s financial flexibility.

Conclusion

Cisco announced its intent to acquire privately held data integration and data analytics firm Composite Software for $180 million in cash and incentives. This acquisition is too small to move the needle, though Cisco continues to acquire smaller firms at a rapid pace in order to push further into software. Composite will be Cisco’s sixth acquisition of 2013 and 13th acquisition over the past 12 months. While Cisco has a solid long-term record of effectively integrating smaller acquisitions, we cannot ignore the fact that integration risk rises as the pace of M&A increases.

Ahsan Aslam Khan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Ahsan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Cisco’s Clear Dominance in Data Networking originally appeared on Fool.com is written by Ahsan Aslam.

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