Why Shares of Cisco Systems Rose 11% in 2016

By Timothy Green Markets Fool.com

Image source: Cisco Systems.

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What happened

Shares of networking hardware giant Cisco Systems (NASDAQ: CSCO) jumped 11.3% in 2016, according to data provided byS&P Global Market Intelligence. While revenue declined slightly in each of the past four quarters, Cisco has put together a long streak of beating analyst estimates for both revenue and earnings. The stock rose slightly more than the S&P 500 index last year, driven by these earnings beats.

So what

While Cisco reported year-over-year revenue declines in each of its four quarterly reports in 2016, the sale of the SP Video CPE business was the main culprit. Adjusting for this divestiture, Cisco managed to grow revenue by between 1% and 3% each quarter. This was enough to beat analyst estimates for revenue in all cases.

About 45% of Cisco's revenue comes from its core switching and routing segments, which are no longer consistently growing, with the rest coming from faster-growing segments like security and collaboration. While switching revenue was flat in fiscal 2016 and routing revenue slumped 4%, collaboration and security revenue rose by 9% and 13%, respectively. This growth helped balance out weakness in the core business.

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CSCO data by YCharts.

Cisco also beat analyst estimates for earnings each quarter, with profitability holding up better than revenue. Share buybacks helped, with the company spending nearly $4 billion in fiscal 2016 buying back its own shares. Cisco does expect a decline in revenue and earnings during the second fiscal quarter of 2017. That guidance sent the stock lower during the last few months of last year.

Now what

Some of Cisco's growth businesses performed poorly during the last reported quarter. Collaboration and data center revenue each fell by 3% year over year. Security remained strong, growing by 11%, but Cisco's guidance suggests that this wasn't an anomaly.

Cisco has made plenty of acquisitions as it aims to diversify away from hardware. The biggest in quite a while, the $3.7 billion purchase of software provider AppDynamics, was announced in January 2017. Cisco is paying a steep price, and I'm a little concerned that the company is becoming undisciplined when it comes to splurging for start-ups. Acquisitions are important for Cisco, but dramatically overpaying will do more harm than good.

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Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.