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Background and Thesis

The purpose of this article is to calculate the returns one can reasonably expect by buying Cisco (NASDAQ:CSCO). We believe the stock offers excellent growth prospects in relation to price at 12.94x trailing 12-month earnings (ignoring $5.50 of net cash per share adjusted for taxes). The stock has pulled back a little in the last few weeks, which gives us the opportunity to load up at a more favorable entry price.

Company Overview

Cisco is a long-term cash flow generator...


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Focused on returning excess cash to shareholders (buybacks and dividends) ...


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Below one can see how cash is deployed. 45% of cash generated over the last 5 years was returned to shareholders ...

Stable levels of invested capital...

Revenues/Invested Capital pulled back a bit recently, but we believe we are in the midst of a mid-cycle slowdown ...


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Margins have been strong and look like they could take a run at historic highs...


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ROIC is slightly above 5-year averages...


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Fair Value

The stock is right now trading 1 Standard Deviation away from its 5-year average relative P/E to the market. This is a 15% discount to the market. We think the stock has better earnings growth than the market and this discounted multiple seem unjustified.

Using Cisco's maximum, minimum and average historical Returns On Invested Capital, we have calculated based on the historical levels of Invested Capital possible ranges for where NOPAT could be (see below). Right now, NOPAT is around average historical ROIC levels. It suggests to us that Cisco is mid-cycle. Please note that the NOPAT is based on current levels of invested capital and we expect invested capital to continue to grow going forward that should result in an even higher NOPAT.

Cisco is currently trading on a P/E of 12.9x trailing earnings. We have multiplied the current P/E by the historical NOPAT levels (derived from minimum, average and maximum ROIC levels) to get a sense of where the market cap for the company can trade. One can observe that right now the stock is trading just below its average fair value based on its current P/E.


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Historically, Cisco has traded on a market P/E. The current market multiple is 15.47x. We have multiplied the current P/E by the historical NOPAT levels (derived from minimum, average and maximum ROIC levels) to get a sense of where the market cap for the company can trade assuming multiple expansion. In the chart below you can see the actual market cap of Cisco is extremely depressed and if we see a re-rating in the stock (multiple expansion) then there is significant upside.

EPS Assumptions

Our annualized average EPS estimate for the next 5 years is 12.1%. The various components can be seen below...

Expected Return

Based on the current stock price of 20.97, we believe the IRR over the next 5 years will be between 15 and 18%. This combines EPS growth, dividends, and possible multiple expansion. The end result could be a doubling in the stock price to 45.14, assuming the general market doesn't tank and ignoring the distribution of a tax adjusted $5.57 in net cash per share.


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Source: Cisco Offers Investors An Annualized Gross Return Of Between 15-18% Over The Next 5 Years