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The Gist

Cisco Systems, Inc. (CSCO) has been on a roller coaster ride the last couple of years. Even so, I feel Cisco is a solid buy right now. It is well-positioned for 2013 growth. The stock is in good shape both fundamentally and technically and has significant catalysts for growth going forward. Nevertheless, let's not get carried away just yet. We need to perform some due diligence to make sure this dog can hunt. Please review the following analysis of Cisco for an in-depth analysis of the stock's upside potential.

In the following sections, we will perform a review of the fundamental and technical state of Cisco followed by an analysis of the underlying catalysts for the stock to determine what upside exists. The following charts are provided by Finviz.com, Ycharts.com and Yahoo Finance.

Fundamental Review

Cisco has a fortress balance sheet with $45 billion in cash and cash equivalents. The company is trading at 12 times free cash flow. Cisco reported an 11% increase in net income year over year and paid nearly $744 million in dividends. Cisco's dividend yield is 2.75%. Cisco's net profit margin is 17.90%.

Price To Book Ratio Analysis

The stock is currently trading one and a half times below the historical average price to book ratio.

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Currently, Cisco is trading for two times book value when normally it trades for approximately five times book. It's not a perfect apples to apples comparison, but is still vastly less than the norm.

Price To Earnings Ratio Analysis

Cisco is trading at a multi-year low price to earnings ratio of 13 while the historical average is over 26.

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At the same time earnings per share are increasing by 20% quarter over quarter.

Earnings Per Share Review

As far as earnings per share go, Cisco is firing on all cylinders. EPS is up over 27% this year and 47% over the last two years.

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This bodes well for the stock as value and income investors begin to see dividend increases and stock buyback programs.

Technical Review

The company currently is trading 2% below its 52 week high and has 5% potential upside based on the consensus mean target price of $21.71 for the company. Cisco was trading Thursday at $20.38, up almost 2% for the day.

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The stock is up 33% from the August low of $15. Cisco just broke out above the major long-term resistance line.

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This is may be the start of the next leg higher based on how incredibly undervalued Cisco has become. Cisco is still solidly in an uptrend. Letting your winners run is just as difficult as cutting your losers off. The potential upside created by an improving market coupled with the prospects of growing EPS and dividends does not appear to be priced in to the stock. The stock recently broke out to the upside and complete the golden cross. Both actions taken together are very bullish.

2013 Growth Catalysts

One of Cisco's primary catalyst for growth is the Cisco Open Network Environment or the Cisco's ONE platform for remotely programming its hardware.

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Cisco has made several strategic acquisitions (l, ll, lll) pertaining to this effort recently. The Cisco Open Network Environment is delivered through a variety of mechanisms, including platform APIs, agents and controllers, and virtual overlay solutions.

It increases the flexibility to choose from a variety of technologies and improves network consistency thereby saving time and money hopefully improving the bottom line. I posit Cisco's focus on providing best in class network management software and hardware will be well received.

Sector Comparisons

Cisco vs. Industry Price to Book Ratios

Cisco trades for one of the lowest price to book ratios out of the competition at 2.05.

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Intel Corporation (INTC) trades at 2.12, Microsoft Corporation (MSFT) at 3.37, Apple Inc. (AAPL) at 4.24 and International Business Machines Corp. (IBM) at 10 times book.

Cisco vs. Industry Price To Earnings Ratios

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Cisco seems fairly valued when comparing price to earnings trailing two month ratios against other industry leaders. The S&P 500 average is approximately 15.

Analyst Recommendations

The stock is currently trading just below the consensus mean price target of $21.72, by 37 analysts.

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Downside Risk

  • The Eurozone sovereign debt debacle could finally implode causing another credit crunch large enough to delay the European technology upgrade cycle.
  • Execution risk: Cisco does not meet earnings expectations or fails to raise the dividend.
  • Cisco's stock runs out of steam as investors take profits and move on after such a large percentage move in the stock.

My Take

Cisco is trading at a low price to earnings multiple even when taking in to account lower earnings expectations. Furthermore the stock is trading several multiples below the long-term norm.

Cisco is in the process of reinventing itself. The proliferation of smartphones and other mobile devices should be a major profit driver for the company. I posit the need for network improvements as the growth of people transacting on their mobile devices will soon reach a tipping point and Cisco will be there to provide solutions. The tide is turning for Cisco. Therefore, Cisco is a long-term buy.

Furthermore, the market is currently being held back due to the uncertainty over the resolution of the fiscal cliff. I don't think the politicians will allow us to go over the cliff. They will find a way to make it happen. This will clear the way for the markets to rally.

Finally, the Fed is currently employing quantitative easing which should underpin the markets providing the so called "Bernanke Put." Based on these assumptions I believe the risk reward for starting a position in Cisco is favorable.

I see opportunity ahead for Cisco. If you are considering buying in to Cisco, I would wait a couple days for the stock to cool off some prior to starting a position. Even so, I don't see Cisco falling below $19 anytime soon. For this reason I feel the risk/reward equation favors long trades at this point. Nonetheless, do your own due diligence and layer in to any position to reduce risk.

The Bottom Line

The stock is a solid buy at this level if the U.S., Chinese and European markets continue to improve. Cisco seems poised for solid growth. My target price is $30 within the next twelve months. If you choose to start a position in any stock, I suggest layering in a quarter at a time at a minimum to reduce risk.

Source: Cisco: The Time To Buy Is Now

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article is for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.