Better Buy for 2022: Cisco vs. CommScope

The adoption of remote working structures and ongoing digital transformation worldwide are driving the demand for advanced, cloud-based networking products and solutions from residential, commercial, and industrial customers. In addition, the deployment of 5G technology and significant funding for future projects should bode well for the networking industry. The global network infrastructure market is expected to grow at a 3.9% CAGR to $229.74 billion by 2026. So, both Cisco Systems (CSCO) and CommScope Holding Company (COMM) should benefit.

CSCO and COMM are two prominent players in the networking space. CSCO designs and manufactures Internet Protocol (IP) based networking products and services related to communications and information technology worldwide. The company sells its products and services directly and through systems integrators, service providers, resellers, and distributors. In comparison, COMM provides infrastructure solutions for communications and entertainment networks. It operates through four segments: Broadband Networks; Home Networks; Outdoor Wireless Networks (OWN); and Venue and Campus Networks (VCN). It sells its products through specialized resellers and distributors, satellite video distributors, system integrators, and directly to customers.

In the past year, CSCO gained 31%, while COMM plunged 34%. Which of these stocks is a better pick now? Let us find out.

Latest Developments

On December 1, 2021, Datagroup, a leading Ukrainian telecom operator for business and home users, announced it is building a secure and reliable high-speed data transmission network with CSCO’s Cisco Routed Optical Networking and Converged SDN Transport architecture solutions. This architecture will help Datagroup deploy one of the most flexible, automated, and efficient networks in the Ukrainian telecom market, integrate open data models and standard APIs and simplify the commissioning of new services. The two companies are looking forward to a long-term partnership with each other.

On January 12, 2022, ViacomCBS (VIAC), a diversified multinational mass media and entertainment conglomerate, launched FAVE and migrated its DABL and select SHOWTIME linear channels from satellite to Content Delivery Network (CDN) IP distribution using COMM’s CommScope DigiCipher Streaming system. COMM’s participation in the decision-making process and investing in its DigiCipher Streaming system should enable VIAC to drive greater efficiencies and cost savings, eliminate geographic dependencies, and expand its footprint. COMM is looking forward to a long-term partnership with VIAC.

Recent Financial Results

CSCO’s total revenue for its fiscal 2022 first quarter, ended October 30, 2021, increased 8.1% year-over-year to $12.90 billion. The company’s non-GAAP gross profit came in at $8.32 billion, representing a 6% rise from the prior-year period. CSCO’s non-GAAP operating income came in at $4.29 billion, up 10% from the prior-year period. While its non-GAAP net income increased 8.2% year-over-year to $3.48 billion, its non-GAAP EPS increased 7.9% to $0.82. The company had $7.62 billion in cash and cash equivalents as of October 30, 2021.

For its fiscal 2021 third quarter ended September 30, 2021, COMM’s net sales decreased 2.9% year-over-year to $2.11 billion. The company’s non-GAAP gross profit came in at $664.30 million, down 10.8% from the prior-year period. Its operating income came in at $21 million, indicating a 62.4% decline from the prior-year period. While its non-GAAP net income decreased 41.4% year-over-year to $72.30 million, its non-GAAP EPS grew 43.1% to $0.29. The company had $411.5 million in cash and cash equivalents as of September 30, 2021.

Past and Expected Financial Performance

CSCO’s EBIT and levered free cash flow grew at a CAGR of 0.4% and 3.6%, respectively, over the past three years.

CSCO’s EPS is expected to grow 6.2% year-over-year in the fiscal year 2022, ending July 31, 2022, and 7.6% in fiscal 2023. The company’s revenue is expected to increase 5.9% year-over-year in fiscal 2022 and 5% in fiscal 2023. CSCO’s EPS is expected to grow at a 6.5% rate per annum over the next five years.

In comparison, COMM’s EBIT and levered free cash flow decreased at CAGRs of 19.3% and 13.6%, respectively, over the past three years.

Analysts expect COMM’s EPS to decline 19.9% year-over-year in fiscal 2021, ending December 31, 2021, and rise 26.4% in fiscal 2022. Its revenue is expected to grow 0.1% year-over-year in fiscal 2021 and 3.1% in fiscal 2022. The company’s EPS is expected to grow at a rate of 12.8% per annum over the next five years.

Valuation

In terms of non-GAAP P/E, CSCO is currently trading at 17.46x, 118.3% higher than COMM’s 8x. In terms of forward EV/Sales, COMM’s 1.47x compares with CSCO’s 4.67x.

Profitability

CSCO’s trailing-12-month revenue is almost six times COMM’s. CSCO is also more profitable, with a 31.2% EBITDA margin versus COMM’s 13%.

Furthermore, CSCO’s net income margin and levered free cash flow margin of 22.4% and 28.2%, respectively, compare favorably with COMM’s negative values.

POWR Ratings

While CSCO has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, COMM has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

CSCO has a B grade for Stability, which is in sync with its lower volatility compared to broader markets. CSCO has a 0.94 beta. COMM’s C grade for Stability reflects its higher volatility. COMM has a 1.69 beta.

CSCO has an A grade for Quality, consistent with its higher-than-industry profitability ratios. CSCO’s 22.4% trailing-12-month net income margin is 249.5% higher than the 6.4% industry average. COMM’s D grade for Quality is in sync with its negative trailing-12-month net income margin.

Of the 55 stocks in the C-rated Technology - Communication/Networking industry, CSCO is ranked #6, while COMM is ranked #45.

Beyond what we have stated above, our POWR Ratings system has also rated CSCO and COMM for Growth, Sentiment, Value, and Momentum. Get all CSCO ratings here. Also, click here to see the additional POWR Ratings for COMM.

The Winner

Despite the ongoing volatility in the markets, significant spending on networking solutions should benefit both CSCO and COMM. However, I believe higher profitability makes CSCO a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology - Communication/Networking industry.

CSCO shares were trading at $59.09 per share on Wednesday afternoon, down $0.64 (-1.07%). Year-to-date, CSCO has declined -6.20%, versus a -4.11% rise in the benchmark S&P 500 index during the same period.

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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