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Better Buy: Cisco Systems, Inc. vs. General Electric

Both Cisco (NASDAQ: CSCO) and industrial giant GE (NYSE: GE) are in the midst of sweeping transformations. In Cisco's case, CEO Chuck Robbins is focused on paring overhead as it transitions away from legacy switches and routers to cloud Infrastructure as a Service (IaaS) and software sales to drive recurring revenue.

GE's many changes include tackling new markets such as the industrial Internet of Things (IoT). The transition GE is undergoing also includes a host of internal changes with new CEO John Flannery and pending CFO Jamie Miller, among others in an attempt to get back on track.

Image source: Getty Images.

The case for GE

It's too early to blame last quarter's disappointing earnings results on Flannery since he just took the helm on Aug. 1. But Flannery is wasting no time implementing changes, including the replacement of outgoing CFO Jeffrey Bornstein with Miller beginning Nov. 1. As per Flannery, there are a lot more transformations to come.

Nov. 13 could prove to be a defining date in GE's long and storied history. After receiving a letter from the Securities and Exchange Commission (SEC) questioning the manner in which GE reports earnings, Flannery said he'll unveil plans to simplify the releases. At the same time, investors will learn what businesses GE intends to sell, new operating procedures to cut costs, and an updated share buyback plan, among others.

GE stock has nosedived since announcing earnings, extending its downward spiral to 35% year to date. Total revenue climbed 14% to $33.5 billion, but GE was undermined by a whopping 18% jump in operating expenses to $32 billion. Excluding GE Capital, expenses for its primary units soared 20%. Not surprisingly, earnings per share (EPS) dropped to $0.22, a 4% decline compared to last year.

Despite the negativity, or perhaps because of it, a leaner, meaner GE in the coming months and years is enough to make it a long-term stock to consider. An argument for GE stock is more compelling considering its 4.6% dividend yield.

The case for Cisco

Though the fiscal year didn't end on a high note, Cisco had a sound, if not spectacular, 2017. The $12.1 billion in revenue Cisco generated in the fourth quarter was down 4%, though Cisco's $48 billion for the year was a mere 2% decline. Keeping a handle on overhead helped boost Cisco's EPS 1% to $2.39 a share, excluding one-time items.

On an adjusted basis, operating expenses declined 7% last year. Looking ahead, Cisco's ongoing drive to grow recurring revenue should help keep spending under control. A shining example of Cisco delivering on its recurring revenue initiative was the four-percentage-point gain to 31% last quarter. Of Cisco's $12.1 billion in revenue last quarter, $3.72 billion was recurring.

The revenue foundation Cisco is building takes time, but over the long haul it will translate to relatively predictable growth quarter in, quarter out. And if Cisco's deferred revenue is any indication, its steady ongoing sales growth will continue. Cisco ended 2017 with $18.5 billion in deferred revenue, up 12%, "driven largely by subscription-based and software offerings."

Cisco can't measure up to GE's dividend, but at 3.3% it's well above its sector average. Things really get interesting comparing Cisco's price-to-earnings (P/E) ratio to its peers. At 18.1 times earnings, Cisco is trading at nearly half the 34.4 mark of its competitors.

The envelope, please

Over the long run, Flannery's efforts to streamline GE's multiple businesses and cut overhead could prove to be a boon for value investors. GE is increasing total revenue on a consistent basis, and with forays into fast-growing markets including IoT and 3D printing, the potential for growth is there.

The changes Cisco is undergoing also take time, but a dependable source of revenue will pay off for patient investors. Considering its bargain basement stock price, inroads into high-growth markets, and a clear path ahead, Cisco gets the nod as the better buy.

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Tim Brugger has no position in any of the stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.