Thursday, May 10, 2012

Stock Follow-Up: Cisco Systems, Inc. (NASDAQ:CSCO)

I felt that I should write another small blog post on Cisco Systems, since their quarterly financials were released today and caused over a 10% drop in the share price. I took a quick glance at the numbers and immediately felt that the market is greatly over-reacting to earnings falling short of analyst estimates. Both revenue and gross profit increased slightly over last quarter and more significantly over the year-ago quarter. Profit margins, research and development, and selling/general/administrative costs all stayed stable over the last four quarters. Net income only shrunk slightly over that of last quarter, and earnings per share stayed around the same. Owner earnings actually grew by 12% over last quarter, and there was only a small increase in the number of shares outstanding.

I take all this to mean that my original investment thesis on Cisco still stands, despite the significant drop in share price. Therefore, further purchase of shares would make sense for me, since the long-term fundamentals of the company have changed very little or not at all. I am not concerned that the stock price has dropped by around 17% from my initial entry point. I am still convinced that Cisco has great potential over the long term, and am comfortable with my conviction. I would only take a loss of 17% in value if I were to sell my shares right now, but I don't intend on doing so for a very long time yet.

Disclosure: I am long CSCO.

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