Cisco Systems (CSCO 2.16%) and General Electric (GE 0.37%) have often been considered stable investments for conservative investors. Cisco is the world's largest manufacturer of networking routers and switches, and GE provides industrial products and services for a wide range of industries.
Yet the two companies' fortunes diverged over the past five years, as Cisco's stock rallied about 70% and GE's stock plunged over 50%. Cisco's revenue rose again as enterprise customers upgraded their networks, it repatriated its overseas cash, and it expanded its higher-growth applications and security businesses through acquisitions.
GE, which never fully recovered from the financial crisis a decade ago, tried to streamline its business by divesting weaker units, cutting jobs, and slashing its dividend. But it failed to generate consistent growth, and operating under three CEOs over the past three years jumbled its strategies. It was also dropped from the Dow Jones Industrial Average last year.
I compared these two companies back in early 2017 and concluded that Cisco was a better overall investment than GE. Let's take a fresh look at both companies and see if that thesis still holds up today.
Image source: Getty Images.
Cisco's strengths and weaknesses
Cisco's revenue and earnings growth decelerated significantly last quarter due to soft demand from service providers in emerging markets, enterprise customers, and commercial customers. Its revenue in China also tumbled as it was blocked from big contracts from state-backed enterprises.
|
YOY growth |
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
|---|---|---|---|---|---|
|
Revenue |
8% |
7% |
6% |
6% |
2% |
|
EPS* |
23% |
16% |
18% |
19% |
12% |
YOY = Year-over-year. *Non-GAAP. Source: Cisco quarterly reports.
Cisco expects its revenue to decline 3%-5% annually in the second quarter, and for its non-GAAP earnings to grow just 3%-5%. That deceleration indicates that Cisco doesn't expect the macro headwinds to dissipate any time soon.
Wall Street expects Cisco's revenue to dip 2% this year and for its earnings -- buoyed by buybacks funded by its repatriated cash -- to rise 5%. That's a decent growth rate for a stock that trades at 14 times forward earnings.
Cisco's stock still fell about 15% over the past six months as investors realized that its growth streak in 2019 wouldn't extend to 2020. However, Cisco still pays a decent forward dividend yield of 2.9%, and it's raised that dividend annually for eight straight years.
Image source: Getty Images.
GE's strengths and weaknesses
GE's core strategy has been to focus on the growth of its core industrial businesses as it cuts costs and divests non-core assets. It gauges that progress with its industrial organic revenue -- which excludes non-industrial businesses, acquisitions, and divestments -- and its industrial operating profit. Its industrial organic revenue grew at a healthy pace over the past year, even though its profit growth remains wobbly:
|
YOY growth |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|---|---|---|---|---|---|
|
Revenue |
(4%) |
5% |
(2%) |
(1%) |
0% |
|
Industrial organic revenue |
1% |
8% |
5% |
7% |
7% |
|
Industrial operating profit |
(23%) |
(16%) |
(14%) |
(26%) |
19% |
|
EPS* |
(33%) |
(60%) |
(7%) |
(6%) |
36% |
YOY = Year-over-year. *Non-GAAP. Source: GE quarterly reports.
On a reported basis, GE's power, aviation, and financing arm revenues declined annually during the first nine months of 2019, which mostly offset the growth of its renewable energy and healthcare units.
Looking ahead, GE's aviation unit -- which generated over a third of the company's revenue in the first nine months -- will likely struggle due to Boeing's (BA 2.29%) suspension of its 737 MAX aircraft. Morgan Stanley analyst Stephen Tusa estimates that Boeing accounts for 70% of the unit's orders for commercial engines.
GE expects its industrial organic revenue to rise in the mid-single digits for the full year, and for its adjusted earnings to dip 8% at the midpoint. Analysts expect its reported revenue to decline 1% next year, but for its earnings to rise 10%. GE currently trades at 17 times forward earnings, but two dividend cuts over the past two years reduced its forward dividend yield to just 0.4%.
The clear winner: Cisco
Cisco's growth is decelerating due to cyclical headwinds, but its margins are stable, it pays a dependable dividend, and it has a much lower debt-to-equity ratio than GE. GE remains a work in progress. Some of its challenges are cyclical, but many of its wounds -- including its high debt-to-equity ratio of 3.3 -- are self-inflicted. Simply put, Cisco should remain a better long-term investment than GE for the foreseeable future.
