The communication equipment and technology industry moves fast and is highly sensitive to market trends and sentiments. Any unfavorable move by a company could result in sales and revenues slipping significantly. This cyclical industry boasts a wide array of firms which cater to a spectrum of customers by providing an even greater variety of products; from communication chipsets to devices and systems.
In an earlier article we discussed BlackBerry (NASDAQ:BBRY), Cisco Systems (NASDAQ:CSCO), Ericsson Telephone Company (NASDAQ:ERIC), Qualcomm (NASDAQ:QCOM) and Motorola Solutions (NYSE:MSI). Looking at the market fundamentals and base expectations on future investments of these companies, we found out that Cisco Systems was totally the best bet. In addition, the same story was told about this leading company -- much more favorably positioned as compared with some other its competitors, such as Alcatel-Lucent (NYSE:ALU) and Juniper (NYSE:JNPR).
In this article, I will compare Cisco Systems, Nokia (NYSE:NOK), Ericsson and by using the stock valuation model to find out which is the most profitable bet for 2013 in this selection. Well, would Cisco become absolutely the best tech bet in 2013?
Stock Valuation Model
Before reaching any conclusion, let's analyze key statistics for each company. Here I'm going to use the "Stock Valuation Model" to find out which is the "Best Bet".
Indicators for Valuation
Dividend Yield (%)
1 Month Stock Returns (%)
Year to Date Stock Returns (%)
1 Year Stock Returns (%)
3 Year Stock Returns (%)
52-Week Change (%)
S&P500 52-Week Change (%)
50-Day Moving Average
200-Day Moving Average
Data from Morningstar and Financial Visualizations on March 20, 2013
The stock valuation model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock's expected risk and return. I am using different fundamental and technical factors in order to rank a stock.
The most important thing to look for before buying any stock is its "Intrinsic value". CSCO has an Intrinsic Value of $28.89 per share. Therefore, it is undervalued compared to its price of $20.90 per share, giving a upside potential of 39%. However at the same time, ERIC has an intrinsic value of $11.44 per share. Therefore, it is fully valued compared to its price of $12.31 per share. NOK has an Intrinsic Value of $3.32 per share. Therefore, it is overvalued compared to its price of $3.78 per share.
The better the financial health of the company the higher the expected returns. In this parameter, according to the table above, CSCO is doing exceptionally well compared to NOK and ERIC
According to the earnings consistency analysis, each year's EPS numbers should be better than the previous year's. One dip is allowed, but the following year's earnings should achieve a new high. CSCO's annual EPS, before extraordinary items for the last 5 years (from earliest to the most recent fiscal year), were 1.31, 1.05, 1.33, 1.17, 1.49. However looking at ERIC's and NOK's 0.56, 0.18, 0.55, 0.59, 0.28 and 1.41, 0.32, 0.67, -0.42, -1.12 respectively, one can conclude that CSCO is doing fairly well by comparison
The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level of debt, an investor may want to avoid this stock altogether. CSCO's Debt/Equity (0.29%) is considered low enough, a little higher than ERIC (0.17%) and lower than NOK (0.63%).
Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for CSCO is 3.41%. This should be less than the growth rates for the 3 previous quarters, which are 21.21%, 63.64%, and 18.18%. CSCO passes this test, which means that it has strong, reasonably steady earnings. However, ERIC and NOK posted several quarters of skimpy earnings.
Preferred companies must have a ROE of at least 17%. CSCO's ROE of 17.91% is above the minimum of 17% and also well above the ERIC's ROE of 3.58% and NOK's ROE of -32.8%.
The P/E ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model is not greater than 15. Stocks with moderate P/Es are more defensive by nature. CSCO's P/E is 12.0, which is well below of the Industry Average of 17.0. However, ERIC's and NOK's P/Es are 46.0 and -3.3 respectively.
Companies must increase their EPS by at least 30% over a ten-year period and the EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. CSCO posted an EPS growth over that period of 175.2%, but EPS for ERIC and NOK were negative for the last 5 years.
Relative Timing is a fast, smart and accurate indicator of a stock's price trend. RT is computed from an analysis of the direction, magnitude, and dynamics of a stock's price movements over one day, one week, one quarter and one year time periods. Once a stock's price has established a strong trend, it is expected to continue in that trend for the short-term. If a trend dissipates, RT will gravitate toward 1.00. RT will explode from bottoms, dive from tops, and reflect changes in price momentum.
CSCO has a Relative Timing rating of 0.99, which is fair on a scale of 0.00 to 2.00. ERIC has a Relative Timing rating of 1.35, which is very good on a scale of 0.00 to 2.00. NOK has a Relative Timing rating of 0.84, which is poor on a scale of 0.00 to 2.00.
Quarterly EPS Change
RETURN ON EQUITY
LONG-TERM EPS GROWTH
Strength on Technical Chart
Why Cisco is the Best Bet …
The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, notable return on equity and attractive valuation levels. From above score, it can be seen that CSCO has beaten ERIC and NOK on an Average Score.
- Cisco will be in the best position to grasp the opportunity in growth of data mining, cloud computing, WiFi home calling, mobile broadband and data intensive applications sectors by using its strength of diverse products, global market leadership, geographically diverse businesses, and economies of scale.
- Cisco has a strong balance sheet with $25 billion of net cash (cash less debt), the stock is cheap - trading at 9 times earnings (excluding net cash), it's providing double-digit returns on capital, and it is a dominant player in the industry, which is poised to grow at a faster rate than the economy.
- CSCO's 20.3% of total revenue comes from Routers Business, 41.9% from Switches, 29.7% from Advanced Technologies and 8.1% from Services, which makes it's business well diversified and less vulnerable to any major changes in any single industry.
- CSCO's revenue growth has slightly outpaced the industry average of 2.3%. Since the same quarter of the prior year, revenues slightly increased by 5.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- Cisco Systems has improved its earnings per share by 18.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings growth per share over the past two years. We feel that this trend should continue. During the past fiscal year, Cisco Systems has increased its bottom line by earning $1.49 per share versus $1.16 per share in the prior year. This year, the market expects an improvement in earnings ($1.97 per share versus $1.49 per share).
- The company, on the basis of net income growth from the same quarter of the prior year, has significantly outperformed against the S&P 500 and exceeded that of the communications equipment industry average. The net income increased by 17.7% when compared to the same quarter of the prior year, going from $1.777 billion to $2.092 billion.
- The return on equity has improved slightly when compared to the same quarter of the prior year. This can be construed as a modest strength in the organization. Compared to other companies in the communications equipment industry and the overall market, CSCO's return on equity exceeds that of both the industry average and the S&P 500 average.
- CSCO has a forecasted Earnings Growth Rate of 15.0%. However, ERIC and NOK have a forecasted Earnings Growth Rate of -6.0% and -9.0% respectively, which is very poor.
- The recent M&A deals, coupled with Cisco's existing services business, which are growing annually at a rate of 12%, puts Cisco right in the thick of its IT's next growth spurt. However, at the same time, NOK is finding it difficult to compete with companies like Samsung, Apple etc.
- The cloud market is expected to grow to $177 billion over the next three years. This explains why the company has been investing in businesses that combine cloud-based services that also offer enterprise LAN management. This may lead to appreciation in its stock price in near future to a good extent.
Cisco is a best bet for 2013, compared to NOK and ERIC. It can easily reach a target of 40% - 50% above the current value based upon the factors analyzed above. On this basis I recommend a Strong Buy for CSCO. Well, Cisco seems to be an absolute winner among its competitors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.