Cisco Systems, Inc. (CSCO) in San Jose, California, and Calix, Inc. (CALX) in Petaluma, California, are two prominent players in the communications equipment industry. CSCO designs and manufactures Internet Protocol (IP)-based network products and services related to communications and information technology worldwide. It sells its products and services directly and through system integrators, service providers, resellers and distributors. By comparison, CALX is a provider of cloud and software platforms, systems and services focused on the access network, the part 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 selected resellers.
Growing demand for high-speed and secure Internet connectivity due to rapid digital transformation, continued hybrid work, and dramatic increase in the use of advanced technologies has driven the growth of communications equipment manufacturers. This equipment makes it possible to transmit data on its networks. In addition, the growing deployment of 5G technology and increased investment in strengthening broadband infrastructure are expected to further benefit communication equipment manufacturers. The global telecommunications equipment market is expected to grow at a CAGR of 6.8% to reach $866.80 billion by 2028. Thus, CSCO and CALX stand to benefit.
But while CALX stock is down 3.9% over the past year, CSCO has jumped 2.4%. CSCO is also a clear winner with gains of 3.6% over the past week compared to CALX’s 1.5% returns. But which of these actions is a better choice now? Let’s find out.
On April 19, 2022, automaker General Motors Company (GM) announced plans to deploy CSCO’s wireless networking architecture for real-time, high-speed performance testing of pre-production vehicles at 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 helps GM reduce vehicle testing time. This should nurture GM’s relationship with CSCO for the long term.
On April 14, 2022, GTC Broadband (GTC), a broadband service provider (BSP) serving rural Missouri, harnessed the transformative power of Calix Intelligent Access EDGE, Network Innovation Platform (AXOS), and Intelligent Modular System CALX’s E7-2 to streamline the network deployment and subscriber rotation process, enabling BSPs to gain market share quickly and easily. Encouraged by the impressive turnover rates and truck movement metrics, GTC turned to CALX to further improve operational efficiency, reduce operating expenses and increase revenue.
Recent financial results
CSCO’s total revenue for the second quarter of its fiscal year 2022, which ended January 29, 2022, increased 6.4% year-on-year to $12.72 billion. The company’s non-GAAP gross profit was $8.33 billion, indicating a 4% year-over-year improvement. Its non-GAAP operating profit was $4.36 billion for the quarter, up 6.2% from the same period last year. CSCO’s non-GAAP net income increased 5.5% year-over-year to $3.55 billion. Its non-GAAP EPS was $0.84, up 6.3% from the prior year period. And as of January 29, 2022, the company had $6.73 billion in cash and cash equivalents.
For its fourth quarter of fiscal 2021, ended December 31, 2021, CALX’s total revenue increased 3.8% year-over-year to $170.03 million. The company’s non-GAAP gross profit was $90.56 billion, representing a marginal year-over-year improvement. Its non-GAAP operating income was $18.91 million, indicating a 37.2% decline from the prior year period. CALX’s non-GAAP net income fell 39.5% year over year to $17.82 million. As of December 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 free cash flow has grown at a CAGR of 9%. CSCO’s EPS is expected to increase 6.8% year-over-year in its 2022 fiscal year, ending July 31, 2022, and 7.8% in its 2023 fiscal year. business is expected to grow 6.1% in its fiscal 2022 and 5.3% in its fiscal 2023. Analysts expect the company’s EPS to grow at a rate of 7.1% per year over the next five years.
CALX’s leveraged free cash flow has grown at a CAGR of 26.8% over the past three years. Analysts expect CALX’s EPS to decline 36.7% year-over-year in its 2022 fiscal year, ending December 31, 2022, and 30.7% in the fiscal 2023. Its revenue is expected to grow 10.8% year-over-year in fiscal 2022 and 13.6% in fiscal 2023. Analysts expect that the company’s EPS will grow at a rate of 20% per year over the next five years.
In non-GAAP P/E terms, CALX is currently trading at 44.74x, 18.9% higher than CSCO’s 15.39x. And in terms of forward EV/EBITDA, CSCO’s 10.43x compares to CALX’s 26.59x.
CSCO’s revenue over the last 12 months is almost 75.88 times that of CALX. Furthermore, CSCO is more profitable, with a gross profit margin of 63.3% compared to 52.5% for CALX.
Additionally, CSCO’s EBITDA margin and leveraged free cash flow margin of 31% and 20.3%, respectively, compare to CALX’s 13% and 4.3%.
While CSCO has an overall B rating, which translates to Buy in our proprietary POWR rating system, CALX has an overall C rating, which equates to Neutral. POWR ratings are calculated by considering 118 separate factors, each weighted to an optimal degree.
CSCO has an A rating for quality, which is consistent with its industry-leading profitability ratios. CSCO’s leveraged free cash flow of 20.3% over the last 12 months is 102.2% higher than the industry average of 10.1%. CALX’s C rating for quality reflects its lower profit margins than the industry. It has a leveraged free cash flow margin of 4.3% over the last 12 months, which is 57.7% below the industry average of 10.1%.
In terms of stability, CSCO was rated B, which is in line with its lower volatility compared to the broader market. CSCO has a beta of 0.95. CALX’s C rating for stability is consistent with its higher volatility. CALX has a beta version of 1.60.
Of the 54 C-rated stocks in the Technology – Communication/Networking industry, CSCO is ranked #6, while CALX is ranked #42.
Beyond what we stated above, our POWR rating system also rated CSCO and CALX for Sentiment, Value, Momentum and Growth. Get all CSCO reviews here. Also click here to see additional POWR ratings for CALX.
Continuous digitalization and hybrid lifestyles should benefit communications 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 when betting on stocks with an overall POWR rating of Buy or Strong Buy. Click here to access the highest rated stocks in the Technology – Communication/Networking sector.
CSCO shares fell $0.18 (-0.34%) in premarket trading on Friday. Year-to-date, the CSCO is down -15.93%, compared to a -7.68% rise in the benchmark S&P 500 over the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a particular interest in researching market inefficiencies. She is passionate about educating investors, so they can succeed in the stock market. After…