UPDATE: S&P Raises Cisco Systems (CSCO) to 'AA-'; Outlook Stable
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Price: $108.61 --0%
Overall Analyst Rating:
SELL (= Flat)
Dividend Yield: 2.7%
Revenue Growth %: +21.6%
Overall Analyst Rating:
SELL (= Flat)
Dividend Yield: 2.7%
Revenue Growth %: +21.6%
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(Updated - December 16, 2013 3:31 PM EST)
Standard & Poor's Ratings Services raised its long-term corporate credit rating on San Jose, Calif.-based Cisco Systems Inc. (Nasdaq: CSCO) to 'AA-' from 'A+'. At the same time, we removed the corporate credit rating from CreditWatch, where we placed it with positive implications on Nov. 26, 2013. We also raised the senior unsecured debt rating to 'AA-' from 'A+' and removed it from CreditWatch. The outlook is stable.
"We base our upgrade primarily on a reassessment of the surplus cash on Cisco's balance sheet," said Standard & Poor's credit analyst Andrew Chang. "The upgrade reflects our view that Cisco is likely to maintain sizable cash balances, part of which we consider to be surplus cash. Although we believe that Cisco is likely to expand its shareholder return and acquisition strategies over the intermediate term, we expect that its financial policies will remain consistent with the rating," added Mr. Chang.
In calculating Cisco's leverage, we net against debt the portion of cash that we regard as surplus. This, combined with our forecast for continued strong EBITDA and cash flow generation despite challenging market conditions, leads us to assess Cisco's financial risk profile as minimal.
Our assessment of Cisco's "strong" business risk profile reflects the company's "excellent" competitive position based on its strong market share in its core products, growing software and services businesses, significant scale and product diversification, and strong operating efficiency. We view the industry risk as "moderate" and the country risk as "low." We view Cisco's profitability as above average based on its high margins and return on capital compared to peers and its volatility of profitability, we consider very low given its consistent track record of profitability through economic cycles.
In our view, these strengths mitigate the challenges to Cisco's business outlook. Growth prospects over the near term are uncertain as the traditional network equipment industry matures, as evidenced by the anemic first quarter revenue growth and the weak fiscal 2014 outlook. As a result, we expect Cisco to continue to seek new growth opportunities through acquisitions in emerging technology applications and markets where it does not have the same strong leadership position. Technology changes, such as the software defined network and the transition to the cloud, pose additional risks as well as opportunities. Still, Standard & Poor's does not expect these industry dynamics to affect Cisco's financial profile or core business position over the intermediate term.
Cisco's "minimal" financial risk profile is a key supporting consideration for the rating. The company has demonstrated conservative financial policies, maintaining net realizable cash (defined as net cash post-repatriation taxes less funded debt) between $10 billion and $15 billion over time. This and robust cash flow generation give Cisco the flexibility to make large acquisitions or pursue shareholder-friendly initiatives without detracting from the overall credit quality. Cisco's surplus cash position provides substantial debt capacity within the rating. In calculating Cisco's leverage, we net against debt the portion of cash that we regard as surplus.
Standard & Poor's Ratings Services raised its long-term corporate credit rating on San Jose, Calif.-based Cisco Systems Inc. (Nasdaq: CSCO) to 'AA-' from 'A+'. At the same time, we removed the corporate credit rating from CreditWatch, where we placed it with positive implications on Nov. 26, 2013. We also raised the senior unsecured debt rating to 'AA-' from 'A+' and removed it from CreditWatch. The outlook is stable.
"We base our upgrade primarily on a reassessment of the surplus cash on Cisco's balance sheet," said Standard & Poor's credit analyst Andrew Chang. "The upgrade reflects our view that Cisco is likely to maintain sizable cash balances, part of which we consider to be surplus cash. Although we believe that Cisco is likely to expand its shareholder return and acquisition strategies over the intermediate term, we expect that its financial policies will remain consistent with the rating," added Mr. Chang.
In calculating Cisco's leverage, we net against debt the portion of cash that we regard as surplus. This, combined with our forecast for continued strong EBITDA and cash flow generation despite challenging market conditions, leads us to assess Cisco's financial risk profile as minimal.
Our assessment of Cisco's "strong" business risk profile reflects the company's "excellent" competitive position based on its strong market share in its core products, growing software and services businesses, significant scale and product diversification, and strong operating efficiency. We view the industry risk as "moderate" and the country risk as "low." We view Cisco's profitability as above average based on its high margins and return on capital compared to peers and its volatility of profitability, we consider very low given its consistent track record of profitability through economic cycles.
In our view, these strengths mitigate the challenges to Cisco's business outlook. Growth prospects over the near term are uncertain as the traditional network equipment industry matures, as evidenced by the anemic first quarter revenue growth and the weak fiscal 2014 outlook. As a result, we expect Cisco to continue to seek new growth opportunities through acquisitions in emerging technology applications and markets where it does not have the same strong leadership position. Technology changes, such as the software defined network and the transition to the cloud, pose additional risks as well as opportunities. Still, Standard & Poor's does not expect these industry dynamics to affect Cisco's financial profile or core business position over the intermediate term.
Cisco's "minimal" financial risk profile is a key supporting consideration for the rating. The company has demonstrated conservative financial policies, maintaining net realizable cash (defined as net cash post-repatriation taxes less funded debt) between $10 billion and $15 billion over time. This and robust cash flow generation give Cisco the flexibility to make large acquisitions or pursue shareholder-friendly initiatives without detracting from the overall credit quality. Cisco's surplus cash position provides substantial debt capacity within the rating. In calculating Cisco's leverage, we net against debt the portion of cash that we regard as surplus.
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