In the first quarter of 2011, information technology corporation Cisco Systems Inc. (CSCO, Financial) has appeared in the portfolio of yet another guru – Tweedy Browne. Arnold Van Den Berg, a first-time Cisco buyer, acquired Cisco in the first quarter, and four other gurus were first-time buyers in the fourth quarter of 2010. Leon Cooperman, another value investor, listed Cisco on a list of his favorite stocks during a college lecture. The continuing attraction to Cisco, a tech company that provides routing, data and networking products for the Internet, is unusual. Value investors typically avoid trendy tech stocks because they are rarely cheap. Cisco’s uncommon qualities and current price may be causing more value investors to rethink the tech sector.
In 2003, Tweedy Brown wrote in their Investment Adviser’s Report that they had almost “complete ignorance about [technology stocks],” but believed Cisco was overvalued. They compared Cisco’s financials to Johnson & Johnson’s and conclude that, “it is a mystery to us why Cisco trades at a 68% premium to JNJ based on estimated earnings multiples.”
Just a few years later, in their 2010 annual letter, Tweedy Brown had changed its position radically, saying, “Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco’s stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company’s intrinsic value.”
Most value investors buy stocks when they are considered cheap in comparison to their worth and Cisco, a $93.59 billion market cap company, is facing challenges that are driving down its stock price to make it a bargain. Year to date, its stock has declined 16.31%, and over the last year, it declined 37.71%. At $16.93 per share on April 20, 2011, it is only slightly above its 52-week low of $16.52. Cisco has rarely traded lower than that in the last ten years and in 2007, it traded as high as $79 per share. It has also always rebounded to $20-$30 levels after it has dipped to lower ranges. It is selling at historical low P/E, P/S and P/B ratios.
One of the negative factors in its stock decline is its fourth-quarter net income for 2011 – it was down to $1.521 billion from $1.93 billion in the previous quarter, and $1.853 billion the fourth quarter of 2010. However, the TTM income is $7.578 billion, down only slightly from net income for July 2009-July 2010 of $7.767 billion. Its net operating margin has also fallen – down to 14.6% in the fourth quarter of 2010 from 18% in the previous quarter and 18.9% in the fourth quarter the year prior.
Further weakening its balance sheet was its Flip phone unit, which it purchased several years ago for $590 million and which they thought would take their consumer business “to the next level.” This month, Cisco decided to its shut down the unit. Smart phones have all but overtaken the hand-held video market as often happens in trendier tech companies, and is another reason value investors generally avoid them. Many analysts have criticized Cisco for drifting outside of their core competency, which has been fairly stable so far.
In 2003, Tweedy Brown wrote in their Investment Adviser’s Report that they had almost “complete ignorance about [technology stocks],” but believed Cisco was overvalued. They compared Cisco’s financials to Johnson & Johnson’s and conclude that, “it is a mystery to us why Cisco trades at a 68% premium to JNJ based on estimated earnings multiples.”
Just a few years later, in their 2010 annual letter, Tweedy Brown had changed its position radically, saying, “Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco’s stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company’s intrinsic value.”
Most value investors buy stocks when they are considered cheap in comparison to their worth and Cisco, a $93.59 billion market cap company, is facing challenges that are driving down its stock price to make it a bargain. Year to date, its stock has declined 16.31%, and over the last year, it declined 37.71%. At $16.93 per share on April 20, 2011, it is only slightly above its 52-week low of $16.52. Cisco has rarely traded lower than that in the last ten years and in 2007, it traded as high as $79 per share. It has also always rebounded to $20-$30 levels after it has dipped to lower ranges. It is selling at historical low P/E, P/S and P/B ratios.
One of the negative factors in its stock decline is its fourth-quarter net income for 2011 – it was down to $1.521 billion from $1.93 billion in the previous quarter, and $1.853 billion the fourth quarter of 2010. However, the TTM income is $7.578 billion, down only slightly from net income for July 2009-July 2010 of $7.767 billion. Its net operating margin has also fallen – down to 14.6% in the fourth quarter of 2010 from 18% in the previous quarter and 18.9% in the fourth quarter the year prior.
Further weakening its balance sheet was its Flip phone unit, which it purchased several years ago for $590 million and which they thought would take their consumer business “to the next level.” This month, Cisco decided to its shut down the unit. Smart phones have all but overtaken the hand-held video market as often happens in trendier tech companies, and is another reason value investors generally avoid them. Many analysts have criticized Cisco for drifting outside of their core competency, which has been fairly stable so far.
