Cisco Systems, Inc. (CSCO) in San Jose, Calif., and Calix, Inc. (CALX) in Petaluma, Calif., are two prominent players in the communication equipment industry. CSCO designs and manufactures Internet Protocol (IP) based networking products and services related to communications and information technology worldwide. It sells its products and services directly and through systems integrators, service providers, resellers, and distributors. In comparison, CALX is a provider of cloud and software platforms, systems, and services focused on the access network--the portion of the network that governs available bandwidth and determines the range of services offered to subscribers. It develops and markets its cloud and software platforms, systems, and services to broadband service providers (BSPs) through its direct sales force as well as select resellers.
The increasing demand for high-speed and secure internet connectivity due to rapid digital transformation, a continuation of hybrid working, and a dramatic increase in the use of advanced technologies has driven the growth of communication equipment makers. This equipment helps transmit data across its networks. Also, the growing deployment of 5G technology and rising investments in strengthening broadband infrastructure should benefit communication equipment manufacturers further. The global telecom equipment market is expected to grow at a 6.8% CAGR to $866.80 billion by 2028. So, both CSCO and CALX should benefit.
But while CALX stock has declined 3.9% in price over the past year, CSCO has surged 2.4%. CSCO is also a clear winner with 3.6% gains over the past week versus CALX’s 1.5% returns. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On April 19, 2022, automotive manufacturer General Motors Company (GM) announced plans to deploy CSCO’s wireless network architecture for real-time, high-speed performance testing of pre-production vehicles at the GM Milford Proving Ground to instantly analyze critical vehicle data to make faster, data-driven decisions. CSCO’s wireless backhaul technology combines the reliability and speed of fiber connectivity and allows GM to reduce its vehicles' testing time. This should nurture GM’s relationship with CSCO in the long run.
On April 14, 2022, GTC Broadband (GTC), a broadband service provider (BSP) that serves rural Missouri, harnessed the transformative power of CALX’s Calix Intelligent Access EDGE, Network Innovation Platform (AXOS), and E7-2 Intelligent Modular System to streamline the network deployment and subscriber turnup process, making it possible for BSPs to gain market share quickly and easily. Encouraged by the impressive turnups and truck roll metrics, GTC enlisted CALX to improve operational efficiency further, reduce OPEX, and grow revenue.
Recent Financial Results
CSCO’s total revenue for its fiscal year 2022 second quarter, ended Jan. 29, 2022, increased 6.4% year-over-year to $12.72 billion. The company’s non-GAAP gross profit came in at $8.33 billion, indicating a 4% year-over-year improvement. Its non-GAAP operating income was $4.36 billion for the quarter, up 6.2% from the year-ago period. CSCO’s non-GAAP net income increased 5.5% year-over-year to $3.55 billion. Its non-GAAP EPS came in at $0.84, up 6.3% from the prior-year period. And as of Jan. 29, 2022, the company had $6.73 billion in cash and cash equivalents.
For its fiscal year 2021 fourth quarter, ended Dec. 31, 2021, CALX’s total revenues increased 3.8% year-over-year to $170.03 million. The company’s non-GAAP gross profit came in at $90.56 billion, representing a marginal year-over-year improvement. Its non-GAAP income from operations was $18.91 million, indicating a 37.2% decline from the prior-year period. CALX’s non-GAAP net income decreased 39.5% year-over-year to $17.82 million. As of Dec. 31, 2021, the company had $51.33 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, CSCO’s levered free cash flow has increased at a 9% CAGR. CSCO’s EPS is expected to increase 6.8% year-over-year in its fiscal 2022, ending July 31, 2022, and 7.8% in its fiscal 2023. Its revenue is expected to grow 6.1% in its fiscal 2022 and 5.3% in fiscal 2023. Analysts expect the company’s EPS to grow at a 7.1% rate per annum over the next five years.
CALX’s levered free cash flow has increased at a 26.8% CAGR over the past three years. Analysts expect CALX’s EPS to decline 36.7% year-over-year in its fiscal 2022, ending Dec. 31, 2022, and 30.7% in fiscal 2023. Its revenue is expected to grow 10.8% year-over-year in fiscal 2022 and 13.6% in fiscal 2023. Analysts expect the company’s EPS to grow at a 20% rate per annum over the next five years.
Valuation
In terms of non-GAAP P/E, CALX is currently trading at 44.74x, which is 18.9% higher than CSCO’s 15.39x. And in terms of forward EV/EBITDA, CSCO’s 10.43x compares with CALX’s 26.59x.
Profitability
CSCO’s trailing-12-month revenue is almost 75.88 times CALX’s. Also, CSCO is more profitable, with a 63.3% gross profit margin versus CALX’s 52.5%.
Furthermore, CSCO’s EBITDA margin and levered free cash flow margin of 31% and 20.3%, respectively, compare with CALX’s 13% and 4.3%.
POWR Ratings
While CSCO has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CALX has an overall C grade, which equates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
CSCO has an A grade for Quality, which is consistent with its higher-than-industry profitability ratios. CSCO’s 20.3% trailing-12-month levered free cash flow is 102.2% higher than the 10.1% industry average. CALX’s C grade for Quality reflects its lower-than-industry profit margins. It has a 4.3% trailing-12-month levered free cash flow margin, which is 57.7% lower than the 10.1% industry average.
In terms of Stability, CSCO has been graded a B, which is in sync with its lower volatility compared to the broader market. CSCO has a 0.95 beta. CALX’s C grade for Stability is consistent with its higher volatility. CALX has a 1.60 beta.
Among the 54 stocks in the C-rated Technology - Communication/Networking industry, CSCO is ranked #6, while CALX is ranked #42.
Beyond what we have stated above, our POWR Ratings system has also graded CSCO and CALX for Sentiment, Value, Momentum, and Growth. Get all CSCO ratings here. Also, click here to see the additional POWR Ratings for CALX.
The Winner
Continuing digitization and hybrid lifestyles should benefit communication equipment manufacturers CSCO and CALX. However, we think its relatively lower valuation and higher profitability make CSCO a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology - Communication/Networking industry.
CSCO shares fell $0.18 (-0.34%) in premarket trading Friday. Year-to-date, CSCO has declined -15.93%, versus a -7.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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