Analysis: CSCO

We have a new addition to the Bullpen. We are adding Cisco Systems (CSCO)  to that list on today's pullback.

Before we talk more about Cisco, as always, we want to remind the club that our Bullpen list can be found on the page here. You can find more information about why we keep a Bullpen on the page here.

The shares are trading lower this morning after the company reported fiscal third-quarter results after the closing bell Wednesday night. The quarter was solid, with revenues growing 7%, year over year, and topping expectations. Adjusted earnings per share grew 5% YoY and exceeded the consensus estimate by a penny.

Cisco also said its total product orders grew 10% YoY, representing the strongest demand in nearly decade and this bullish view about the future should not be overlooked. The company is currently experiencing broad-based demand across several different areas of its business, driven by substantial growth opportunities in hybrid work, digital transformation, and the cloud.

Furthermore, we liked how 81% of software revenue was sold as a subscription, up from 76% last quarter. Cisco's ongoing transition from hardware to more software/subscription sales is a margin-enhancing opportunity that will lead to a stronger earnings profile over the long-run.

Although we found a lot to like about the quarter, some wind was taken out of Cisco's sails after investors looked at forward guidance. Management said next quarter's earnings are expected to be between $0.81 to $0.83 per share, and this outlook failed to live up to the consensus estimate of $0.85. When we dug into the quarter, conference call, and Jim's interview with CEO Chuck Robbins on Mad Money last night to better understand how there could be a guidance shortfall when so much of the business was experiencing positive momentum, especially in Enterprise demand, what we found was a near-term pressure that we think will be temporary, and therefore represents opportunity.

As management explained on the earnings call, Cisco is currently experiencing higher input costs related to semiconductor constraints and freight. Instead of passing these higher costs over to its customers, Cisco is instead choosing to be thoughtful with its price increases and prefers to take care of its customers today in order to improve its relationship and positioning with them over the long term. We favor that style of business, especially as we may be nearing the point of peak constraints within the supply.

In a market that is currently grappling with concerns about higher interest rates, we also think a value play within tech can work. The shares currently trade at a very reasonable mid-teens price-to-earnings multiple, and we see room for expansion. Two potential drivers of a higher multiple are improving sentiment around enterprise spending, and more progress in the business transformation to software and subscription sales.

Additionally, we like how management consistently returns a boatload of cash to shareholders. Cisco just bought back about half a billion dollars worth of shares in the recent quarter, and $8.7 billion remains under the current authorization. Furthermore, the stock offers a healthy 2.8% dividend yield. Management has also increased its payout for seven consecutive years.

Cisco is already trading off its lows of today's session, but we like how this pullback has taken some "froth" and "hot money" out of the stock as the shares entered the earnings release already up about 17% year-to-date.

Given our positive view on Cisco's demand outlook, the business shift to software and subscription, the very reasonable price-to-earnings multiple, and the healthy capital return policy, we think this is a name to monitor in the days ahead.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.