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Cisco Systems & Value? Who'd a thunk it? CSCO

February 04, 2008 | About:
Cisco Systems [NDQ:CSCO] Feb. 4, 2008 close: $23.82

52-week range: $22.30 - $34.24

Cisco is the leading supplier of networking products for LANs and WANs. Products include routers, switches and netwotrk management software. Domestic revenues were 52.5% last FY out of total sales of about $35 billion. FY 2008 revenues are expected to hit over $40 billion.

Who would have thought CSCO would turn up as a 'value' stock? Yet with current FY estimated earnings of $1.59 [ends July 2008] and $1.82 forecast for FY 2009, these shares are offered at just 14X calendar year earnings for 2008. CSCO's 10-year median P/E has been 35X but that includes the tech insanity of 1998 - 2000. The lowest average annual P/E since 2002 was 21.3X [in 2006].

Cisco held almost $25 billion in cash as of late October against total debt of just $6.6 billion. It is rated A++ for financial strength by Value Line. Every year since FY 2001 has seen rising sales, cash flow, and EPS.

These shares hit $34.20 as recently as November yet their estimates have been raised since they posted October period earnings of $0.35 v. $0.26 year-over-year. Value Line is assuming a 3 - 5 year P/E mulitple of 23X. Even 20X this year's $1.70 calendar year expectation leads to a target price of $34 or + 42% from today's quote.

Risk? Cisco's earnings predictability is not high. It rates only 40th percentile, making all estimates less than binding. All techology companies have 'leapfrogging' risk should alternate systems be developed that would steal market share. That said, CSCO is the world leader in its field and continues to make complementary acquistions to broaden and refresh their market penetration.

At today's price the risk/reward looks very favorable. The recent pullback has given us a chance to own a world class company at a very ordinary valuation.

How cheap is Cisco right now? At its absolute low [split adjusted] $5 price in 1997 the P/E was 21.8X and the shares were set to surge to $82/share by 2000. At 2002's low price of $8.10 [set in a horrible market environment] their P/E was 20X. Cisco's share price then skyrocketed from $8.10 to $29.40 in about 16 months.

From a 14X forward multiple who knows how high these shares can go in the next year or two?

Disclosure: I bought Cisco shares today.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
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Visit Dr. Paul Price's Website


Rating: 3.4/5 (21 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Earnings are due out tomorrow after the close - Wed.
buffetteer17
Buffetteer17 premium member - 6 years ago
"All techology companies have 'leapfrogging' risk should alternate systems be developed that would steal market share."

I judge this risk to be small for Cisco. I'm an engineer, and in a former job, I spent about two years working on network processors, which are the brains for core routers. The reason that there is little risk of Cisco being significantly hurt by a new networking technology is that the Internet is too diverse. There are many interacting parts that have radically different technological designs. There are (1) the core, multigigabit/sec connections between major data centers around the world, (2) the edge, where data fans out from the core routers to multiple fairly local clients (ISPs, phone companies), (3) the last mile, where data reaches individual subscribers, and (4) application boxes, like set top boxes, home and business internal routers, etc. Cisco is in all of these segments. I major breakthough in one segment is not going to change the other segments.
mrubsam
Mrubsam - 6 years ago
If you could get CSCO for $120B market cap you'd be paying around 10X FCF. That's not too far down from here. I don't think it is expensive here but it may be at an earnings peak. JMHO
mrubsam
Mrubsam - 6 years ago
10X FCF less cash on hand I should add.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Earnings were right on estimate but after-market action was negative due to an 'only 10%' revenue growth projection for the next quarter.

Looks like today's opening will present a good buying opportunity for those who believe this is a good company.

There was a nice write-up in Wed's WSJ touting these shares as a tempting purchase and figuring it would be even better if the market knocked the price lower post-earnings announcement.

I'm still a fan.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Cisco: Plenty of Room to Run

Word Count: 466 | Companies Featured in This Article: shutterfly

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CISCO LOOKS REASONABLY PRICED AGAIN. We've stayed on the right side of Cisco Systems' shares since pointing out the networking vendor's opportunities to upgrade Internet capacity to carry video ("Getting the World Wired," Oct. 9, 2006). At the time, growth was perking up at the San Jose, Calif.-based concern, and its shares were selling for about 18 times forward earnings. The stock subsequently rose from 24 bucks to near 34 by the end of September 2007. That's when we took another look ("Cisco: Is the ...

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
The previous posting was from this week's Barrons magazine.
buffetteer17
Buffetteer17 premium member - 6 years ago
I bougtht some shares in after-hours at around $21.50. The next morning I bought some LEAPs right at the opening bell. I didn't buy much because I figured the price would continue dropping and I would buy more. But I didn't get the chance, almost immediately the price started going up and went above my buying threshold.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago


Pasted from Stockpickr.com

Wednesday's Tech Winners & Losers 02/27/08 - 04:23 PM

Updated from 2:17 p.m. EST with new stock prices

Tech stocks were up modestly despite disappointing earnings reports as the major stock indices rose on the possibility of another interest rate cut by the Federal Reserve.

Cisco(CSCO - Cramer's Take - Stockpickr) gained 88 cents, or 3.7%, to $24.95 following an upbeat presentation at the Goldman Sachs Technology Investment Symposium earlier in the day.

The growth of online video, new services in consumer segments with Web 2.0 technologies and ideas being adopted by businesses are contributing to Cisco's growth, said a company executive at the conference.

Cisco's focus on emerging markets also could be a significant growth driver for the company this year, the executive said. Cisco was added Monday to Citigroup's recommended list of stocks and upgraded to buy from hold last week.

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Guru David Tepper added 21.61% to his Cisco position during the March quarter. He paid an average price of $24.40/share.

As of March 31, 2008 he owned 18,850,000 shares.

CSCO closed at $26.51 last week.
epicahab
Epicahab - 6 years ago
This company is also active in the creation and promotion of virtual worlds - an industry that stands to grow in the coming decades.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Guru Bill Nygren took a new position in Cisco during the March quarter.

He bought 2,000,000 shares at an average cost of $24.40/share.

I guess he 'thunk' it was good value, as I did.

CSCO closed at $27.54 yesterday.

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