Cisco Systems, Inc. (CSCO) in San Jose, Calif., designs, manufactures and sells internet protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms, including networking technologies for switching, routing, and wireless products. In comparison, Hewlett Packard Enterprise Company (HPE) in Palo Alto, Calif., is an edge-to-cloud platform-as-a-service company that offers general-purpose servers for multi-workload computing and workload-optimized servers. In addition, it provides mobility and Internet of Things (IoT) solutions under the Aruba brand, including Wi-Fi access points, switches, routers, and sensors.

Since last year, communication equipment has been in high demand as the need for connected and high-end devices increased amid the COVID-19 pandemic, with people spending most of their time at home. Furthermore, communication equipment, such as LANs, WANs, and routers, are expected to continue witnessing increasing demand in the 5G era because remote working is expected to dominate even after the pandemic is beaten. According to a report by Market Research Future, the global telecom equipment market is expected to grow at an 11.23% CAGR  by 2025. Therefore, we think both CSCO and HPE should benefit.

CSCO stock has gained 8.7% in price over the past month, while HPE returned 4.4%. Also, CSCO’s 30.1% gains year-to-date are higher than HPE’s 23% returns. Also, in terms of their past six months’ performance, CSCO is the clear winner with 27.4% gains versus HPE’s 3.2%.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

CSCO acquired Socio Labs, Inc. on July 8. Jeetu Patel, the company’s executive vice president and general manager, said, “The acquisition of Socio Labs is another example of how Cisco is rapidly addressing the evolving needs of our Webex customers and continuing to execute on our vision of providing the most seamless, inclusive, engaging and intelligent platform for meetings and events.”

Meanwhile, on July 1, 2021, HPE announced that it had entered a definitive agreement to acquire Zerto, an industry leader in cloud data management and protection, in a transaction valued at $374 million. The acquisition expands HPE GreenLake and continues to deliver on HPE Storage’s shift to a cloud-native, software-defined data services business.

Recent Financial Results

CSCO’s net revenue increased 8% year-over-year to $13.10 billion for its fiscal fourth quarter, ended July 31, 2021. The company’s non-GAAP operating income grew 10% year-over-year to $4.4 billion, while its cash flow from operating activities increased 18% year-over-year to $4.50 billion. Also, its non-GAAP EPS came in at $0.84, up 5% year-over-year.

HPE’s net revenue increased 11% year-over-year to $6.70 billion for its fiscal second quarter, ended April 30, 2021. The company’s annualized revenue run-rate grew 30% year-over-year to $678 million, while its cash flow from operations came in at $822 million, up from $722 million in the prior-year period. Its non-GAAP EPS increased 70% from the same period last year to $0.46 billion

Past and Expected Financial Performance

CSCO’s EBITDA and EBIT have grown at CAGRs of 1.8% and 2.4%, respectively, over the past three years. Analysts expect CSCO’s revenue to increase 4.4% in its fiscal year 2022. The company’s EPS is expected to grow 6.6% for the quarter ending October 31, 2021, and 6.2% in fiscal 2022. Moreover, its EPS is expected to grow at a 5.9% rate per annum over the next five years.

In comparison,  HPE’s EBITDA and EBIT have grown at  CAGRs of 16.4% and 40%, respectively, over the past three years. The company’s revenue is expected to increase 1.7% in its fiscal year 2022. Its EPS is expected to grow 32.4% for the quarter ending October 31, 2021, and 3.2% in fiscal 2022. HPE’s EPS is expected to grow at an 11.6%  rate per annum over the next five years.

Profitability

CSCO’s trailing-12-month revenue is 1.81 times HPE’s. Also,  CSCO is more profitable with a gross profit margin and net income margin of 64.12% and 21.26%, respectively, compared to HPE’s 32.11% and 2.35%.

CSCO’s 26.75%, 8.95% and 16.19% respective ROE, ROA, and ROTC ,compare with HPE’s 3.94%, 2.25%, and 3.68%.

So, CSCO is the more profitable stock.

Valuation

In terms of forward EV/S, CSCO is currently trading at 4.39x, which is higher than HPE’s 1.11x. And  CSCO’s 16.96x forward non-GAAP P/E ratio is 119.7% higher than HPE’s 7.72x.

POWR Ratings

CSCO has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast,  HPE has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

CSCO has an A  grade  for Quality. This is justified given that its 10.86% trailing-12-month ROTA is higher than the 3.64% industry average. HPE, in contrast,  has a C Quality grade, which is consistent with its 1.20% trailing-12-month ROTA, which is lower than the 3.64% industry average. Moreover, CSCO has a B grade for Stability, which is in sync with its 0.89 beta, while HPE has a C Stability grade, in sync with its 1.22 beta

Of the 56 stocks in the B-rated Technology - Communication/Networking industry, CSCO is ranked #12, while HPE is ranked #29.

Beyond what I’ve stated above, we have also rated the stocks for Sentiment, Momentum, Value, and Growth. Click here to view all the CSCO ratings. Also, get all the HPE ratings here.

The Winner

The communication equipment market is expected to grow exponentially with increasing demand for advanced devices to facilitate remote working. While both CSCO and HPE are expected to gain in the long run, we think it is better to bet on CSCO now because of its higher profitability and relatively more stability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology - Communication/Networking industry here.

CSCO shares were trading at $58.56 per share on Monday afternoon, up $0.34 (+0.58%). Year-to-date, CSCO has gained 33.79%, versus a 20.66% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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