Is Cisco Systems, Inc Stock a Buy?

By Markets Fool.com

No doubt about it, Cisco knocked it out of the park last week after announcing earnings that beat both prior year's results, as well as analyst expectations. Revenue came in just shy of $12 billion, a 7% improvement over fiscal 2014's Q2, and earnings per share really popped -- up 70% on a GAAP basis (including one-time items) to $2.4 billion from the prior year's "paltry" $1.4 billion.

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Not surprisingly, all the good tidings went over well with investors, causing them to big up shares in the tech giant to a multi-year high. Of course, that kind of run-up can make investors considering Cisco a bit skittish; after all, it's too late, right? For short-term, in-and-out investors, it might be too late, but for long-term growth and income investors? Cisco is still worth a look.

The good, and there's a lot of it
It was good to see Cisco grew its top line again, particularly following what was a record-breaking fiscal Q1 with yet another strong quarter. What really stands out isn't just the bump in sales, it's how much of the revenue increase fell to the bottom line last quarter, and what that means for shareholders going forward.

Cisco's huge earnings-per-share improvement despite the aforementioned single-digit revenue increase was primarily the result of CEO John Chambers and team paring excess, and unneeded, overhead. Gross margin in Cisco's fiscal Q2 tells the story. A year ago, Cisco reported gross margin of $5.95 billion: OK, but hardly earth-shattering. Fast-forward a year to Cisco's 2015 second quarter, and gross margin jumped to nearly $7.1 billion.

In other words, Cisco generated just shy of $800 million more in revenue, but its gross margin improved by over $1.1 billion, resulting in its strong per-share earnings. Continued share buy-backs also helped -- Cisco has about 82 million shares less outstanding than it did in the year-ago Q2, but that hardly detracts from what is quickly becoming a lean, more efficiently run Cisco.

When you read Cisco's quarterly reports, or listen in on earnings calls, it doesn't take long before management mentions the Internet of Everything (IoE). Along with cloud and mobile-related products and services, IoE has become a big part of Cisco's new-ish business focus. And it's taking hold. Last quarter, Cisco signed up yet another global metropolis -- in this case, Santiago, Chile -- to transform it into a "smart city." Hamburg, Berlin, and a host of other cities are already onboard.

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Smart cities are expected to become a $1.5 trillion market in the next 10 years, and Cisco has a jump-start on longtime rivals like Hewlett-Packard and IBM . Make no mistake, with expectations that high, HP and IBM will certainly give Cisco a run for its smart city money, but neither can boast the list of deals Cisco has in place. And with so much emphasis on the fast-growing market, don't bet against Chambers and team.

But wait, there's more
Cloud-related data centers are another area of potential growth for Cisco, where it once again runs up against HP and IBM, the current industry leaders. But if calendar Q3 of 2014 is any indication, Cisco is making up ground in a hurry. It can't match HP's or IBM's total server revenues -- yet -- but while both lost market share in Q3, Cisco improved over 30% compared to the year prior.

Even before Cisco's recent earnings announcement, its $0.19 quarterly dividend put it near the top of the tech industry heap. Now, with $53 billion in cash and equivalents on the balance sheet, about $1 billion more than a year ago, Cisco has raised its already-solid quarterly dividend to $0.21 a share. At a nearly 2.9% dividend yield, Cisco deserves to be in most any growth and income discussion.

Is it all smooth sailing from here? Of course not -- huge growth opportunities like IoE bring huge competitive risks. And as impressive as Cisco's bottom-line results have been, growing revenues in the mid-single-digits each quarter isn't anything to write home about. But considering Cisco's continued transition to new markets, including cloud and IoE, the revenues will come. Add in its efficient operations, a nearly 3% dividend yield, and significant growth opportunities, and Cisco should be on a growth and income investor's watchlist.

The article Is Cisco Systems, Inc Stock a Buy? originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.