Drop Cisco Stock And Pick TC Energy and AerCap For Higher Gains?

If you are a Cisco (NASDAQ:CSCO) investor and took advantage of its recent run-up following the company’s better-than-expected Q4 FY’24 results, it may be time to look elsewhere. As of this moment, we find TC Energy (NYSE:TRP) – an operator of energy infrastructure in Canada, the United States, and Mexico, and AerCap Holdings (NYSE:AER) –  an aviation leasing company, as more attractive buys than Cisco.

Why? Simply because the valuation and growth numbers tell us so. TC Energy and AerCap Holdings stocks have both seen higher growth in revenue and operating profits than Cisco Systems in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Cisco Systems.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than CSCO – TRP & AER Stocks?

Specifically, to illustrate the opportunity for TC Energy, you pay $6.70 per dollar of earnings-before-interest-and taxes (EBIT) for TRP stock versus $13.82 for CSCO, and get higher annual growth (5.5% vs 0.9%), higher quarterly growth (8.0% vs -12.8%), and more margin increase (0.7% vs 0.06%). Overall, you get higher revenue, and operating profit growth from TC and AerCap, and pay less than CSCO stock. See our dashboard analysis Better Bets Than CSCO Stock

So What’s The Catch?

Now, could Cisco Systems buck the trend? Could it grow its revenues and profits faster than TC Energy or AerCap Holdings in the coming quarters? Yes, that’s possible. Although Cisco’s financial performance had been weighed down by customers scaling back on orders as they focused on installing and implementing the products purchased over the last few quarters, there are signs that things are getting better. For example, over Q4 Cisco said that its product order growth rose 14% year-over-year. Separately, Cisco is also doubling down on the increasingly important cybersecurity space with its acquisition of Splunk, a software player that uses artificial intelligence to help minimize the risk of cybersecurity incidents. The company has been increasingly pushing toward a recurring revenue model with its software subscriptions and service contracts which could lead to more stable growth.  Over the last quarter, total annualized recurring revenue stood at over $29 billion.

The data below shows both TC Energy and AerCap Holdings outperformed Cisco Systems recently and over the last year. They might repeat this. Related Ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Cisco Systems, To Get More Revenue And Profit Growth?

Note: PEBIT = market cap / last 12M operating income | LTM = Last 12 Months (last 4 quarters)

What About Relative Market Returns?

There is evidence of market reward as TRP stock has returned 14.6%, 11.6%, 24.5% in the last 3M, 6M, 12M which is higher compared to 6.8%, 5.2%, -6.5% for CSCO.

How Did These Metrics Look 1 Year Ago – Could CSCO’s Combination Of Higher Valuation & Lower Growth Persist?

CSCO still had a higher valuation of $14.18 vs $5.6 for TRP but lower annual growth (6.4% vs 11.73%), higher quarterly growth (13.53% vs 5.3%), and less favorable margin change (-0.9% vs 0.4%).

Note: PEBIT = market cap / last 12M operating income | LTM = Last 12 Months (last 4 quarters)

Additional Reference Metrics And Investment Thesis For AerCap and TC Energy

While Cisco is set to see a turnaround after a couple of tough quarters, AerCap and TC Energy are also seeing multiple tailwinds. Aircraft leasing major AerCap stands to benefit from rising demand for travel following Covid-19. More importantly, persistent production issues at aircraft major Boeing have led to an undersupply of commercial aircraft causing lease rates to trend higher. There could be more room for growth, given that the supply issues are likely to persist in the interim.  TC Energy, on the other hand, is focused on stability given its portfolio of contracted hydrocarbon pipelines, which are among the largest in North America. The company also stands to benefit indirectly from higher electricity demand from tech trends such as electric vehicles and artificial intelligence, given that natural gas – which is transported using the company’s pipelines – is playing a growing role in the U.S. power generation mix. The stock’s risk-to-reward ratio could be attractive, given its sizable yield (over 6%) and upside potential. 

Note: PS = market cap / last 12M revenue

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/21/2024
[2] Cumulative total returns since the end of 2016

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