On September 21, 2023, Cisco Systems Inc (CSCO, Financial) experienced a daily loss of 3.67%, bringing its 3-month gain to 5.92%. With an Earnings Per Share (EPS) (EPS) of 3.07, the question arises: Is the stock fairly valued? This article aims to answer that question by providing an in-depth analysis of Cisco Systems' intrinsic value. We invite you to read on and gain valuable insights into the company's valuation.
Company Introduction
Cisco Systems is the world's largest provider of networking equipment and one of the largest software companies globally. The company's primary businesses include selling networking hardware and software, cybersecurity software like firewalls, collaboration products, and observability tools. With a massive sales and marketing team spread across 90 countries, Cisco Systems boasts a global presence. At a stock price of $53.47 per share, the company has a market cap of $216.80 billion. But how does this compare to its intrinsic value?
Understanding GF Value
The GF Value is a proprietary measure developed by GuruFocus to estimate a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line represents the fair value at which the stock should ideally be trading. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on the GF Value calculation, Cisco Systems (CSCO, Financial) stock is estimated to be fairly valued. As a result, the long-term return of its stock is likely to be close to the rate of its business growth.
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Assessing Financial Strength
Investing in companies with poor financial strength can lead to a high risk of permanent capital loss. To avoid this, it's essential to review a company's financial strength before deciding to purchase shares. Key indicators of financial strength include a company's cash-to-debt ratio and interest coverage. Cisco Systems has a cash-to-debt ratio of 3.12, ranking better than 64.95% of 2374 companies in the Hardware industry. The overall financial strength of Cisco Systems is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. Cisco Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $57 billion and an Earnings Per Share (EPS) of $3.07. Its operating margin is 27.3%, ranking better than 97.07% of 2460 companies in the Hardware industry. GuruFocus ranks Cisco Systems' profitability at 9 out of 10, indicating strong profitability.
Growth is a crucial factor in a company's valuation. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Cisco Systems is 6.2%, ranking better than 55.8% of 2335 companies in the Hardware industry. However, its 3-year average EBITDA growth rate is 3.4%, ranking worse than 63.51% of 1962 companies in the Hardware industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can provide valuable insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Cisco Systems's ROIC was 15.92 while its WACC came in at 11.14.
Conclusion
In conclusion, Cisco Systems (CSCO, Financial) stock is estimated to be fairly valued. The company's financial condition is strong, and its profitability is robust. However, its growth ranks worse than 63.51% of 1962 companies in the Hardware industry. To learn more about Cisco Systems stock, you can check out its 30-Year Financials here.
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