Cisco System, Inc: Value and Growth

Although in decline recently, Cisco (NASDAQ:CSCO) is seen by many experts as a cyclical investment which will finally see its upswing in the 2014 fiscal year. One of the clearest signs that it is undervalued is its low price to book ratio of 2.08 which is near its historical ten year low of 1.60. Another indicator that this stock is currently undervalued is its price/earnings to growth ratio (or, PEG ratio) of 0.65 which is well below one. The further below one a company’s price/earnings to growth ratio is, the more dramatically the stock is likely to be undervalued. There are, of course, other signs that Cisco is an undervalued stock poised for a comeback in the next few years:

The IT market

The demand for technology in general is expected to grow in 2014 and the market for enterprise software specifically is predicted to grow by at least 6.8%. Cisco Systems, Inc is one of the leaders in this market and will be sure to get its hands on as much of that growing revenue as possible.

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• CSCO 15-Year Financial Data
• The intrinsic value of CSCO
• Peter Lynch Chart of CSCO

We can also look forward to the new revenue generated from the company’s launching of its new Desktop as a Service (DaaS) solution targeted toward enterprise customers. This new service shows investors that the old tech giant is taking the necessary steps to stay ahead of the market and always keep a lookout for the next trend.

Strong financial record

In addition to being in an industry which appears to be on the verge of collectively rising, Cisco has strong financials which prove it has the wherewithal to persevere through economic hardships—as it indeed has had to these past couple of years.

One key sign of this is the very attractive debt to equity ratio of just 0.28. Furthermore, its debt to equity ratio has been decreasing consistently for the past five years. This means that, despite less than desirable profits, Cisco has managed to continue meeting its debt obligations and is run by people with strong money management skills.

It also boasts steadily increasing cash flow from operations (or, CFO) over the past three years. This means that even in this financial downturn, the money that it is earning is coming from actual business activities such as providing services or selling products rather than desperate maneuvers like selling off assets or acquiring more debt.

It also dominates its market with a relative strength of 72.29 meaning it’s still the industry leader it has been despite recent hiccups in its earnings. Having such a high relative strength (especially in conjunction with a low price to book ratio) is a strong indicator that the stock is currently being undervalued by the market and will be able to make a comeback in the future.

Rewarding the investors

Despite lagging profits, Cisco Systems, Inc still boasts an impressive dividend yield of 2.98% (which currently translates to $0.68 per share). And with a payout of 33.50%, investors can feel reassured that the company is able to maintain these dividends and potentially increase them in the future.

In case you still have some reserve, keep in mind that over the past three years, the amount paid in dividends has tripled from $658,000 in 2011 to $3,310,000 in 2013.

Conclusions:

The growth rate is in a bit of a slump and earnings could certainly be better. Despite this, Cisco is a buy for many expert investors because it is still a strong company with a sturdy financial foundation and attractive dividends for its investors. At the current price of $22.55, Cisco’s stock is almost certainly undervalued and likely to bring healthy returns on investments in the coming years. This is a stock to buy now and stick with for the long run in order to see the maximum benefits this company has to offer its investors.

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