Cisco Systems (CSCO) has gone from long time market laggard to a leader in the market during the rally since the post-election sell-off. CSCO has added some 25% since its post-election low outperforming the overall market during that time. However, the shares are still cheap and the stock is picking up some positive catalysts as well.
Recent positives for Cisco:
- Synergy Research just published a report showing Cisco gained market share in the six main network enterprise segments in 2012 despite tough competition.
- All the talk about what Apple (AAPL) should do with all its cash is helpful on the margin for Cisco. It has the fifth largest cash hoard of any U.S. company at over $46B and it is getting close to the time of the year the company has raised its dividend in the past. Its payout ratio is less than 30% of this fiscal year's expected earnings.
- Consensus earnings estimates for FY2013 have gone up over the last month.
- Finally, the stock recently broke through a long term resistance level (See Chart).
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4 more reasons CSCO still offers value at under $22 a share:
- Stripping out net cash on the books, the stock is selling for less than 8x forward earnings.
- CSCO yields 2.6% and I would look for the company to announce another dividend increase by the end of the second quarter that will take its yield to around 3% at current levels.
- Despite its size and the challenging networking environment, it continues to grow revenues. The company should post slightly better sales gains than 5% and the stock sports a very reasonable five year projected PEG (1.30) for a solid yielder. Also contrast Cisco with another tech giant, IBM; which is projected to average 2% sales growth over the next two fiscal years and has averaged just over 1% revenue growth on average over the last five years. Despite this and a lower dividend yield, IBM is selling at over 11.5x forward earnings and does not have a cash hoard on its balance sheet like Cisco (it actually has over $20B of net debt).
- Even after the stock's recent rise, CSCO is still selling near the bottom of its five year valuation range based on P/CF, P/B, P/S and P/E.
