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Cisco (NASDAQ:CSCO) has been on my watch list for a long time now and I have been fairly critical of its growth by acquisition strategy. Its nearest competitors, Juniper (NYSE:JNPR) and Netgear (NASDAQ:NTGR) repeatedly outperformed the firm during the past 5 years. In this article, I will revisit these companies and perform a fundamentals based valuation analysis to determine if it makes sense to invest in these companies at current levels. The table that follows presents basic information about the subject companies.

Company Basics

CSCO

NTGR

JNPR

Market Cap (Billion)

130

1.27

9.76

Debt to Equity Ratio

23%

0%

14%

Stock Performance 5 Yr

-8%

101%

-20%

Stock Performance 1 Yr

45%

5%

14%

Dividend Yield

2.8%

0.0%

0.0%

Cisco is a giant compared to the other two companies selected for analysis with a market capitalization of $130 billion. Juniper is also a large cap stock with a market capitalization of approximately $10 billion. Netgear, which predominantly serves the home user market is a midcap stock. The companies have low levels of debt (in fact, Netgear is debt free). CSCO is the only dividend payer on the list and yields a respectable 2.8%. The stock has rewarded its shareholders over the past 1 year gaining 45% compared to 5% for NTGR and 14% for JNPR.

Growth Rates:

Next, I evaluated the historical growth rates of revenue, income, EPS, book value and the projected growth rates. These are summarized in the table shown below:

Growth Rates

CSCO

NTGR

JNPR

Revenue

10 Year

9%

16%

20%

5 Year

6%

12%

9%

1 Year

7%

8%

-2%

Income

10 Year

8%

21%

17%

5 Year

2%

14%

-12%

1 Year

24%

-4%

-56%

EPS

10 Year

12%

16%

13%

5 Year

5%

12%

-11%

1 Year

27%

-7%

-56%

Book Value

10 Year

-3%

4%

3%

5 Year

-3%

2%

-2%

1 Year

-3%

3%

-3%

Growth Projections

Next Year

5%

22%

12%

Next 5 Year

8%

2%

15%

Juniper had the strongest annualized growth rate over the past 10 years. However, the revenues declined by 2% during the last financial year. CSCO and NTGR grew at a very similar rate of 7% to 8%. However, NTGR did report a decline in EPS last year. Coming to book value growth rates, CSCO's book value has declined at an annual rate of 3% during the past 1 year, 5 year and 10 year period. JNPR's book value also declined by 3% last year. NTGR is the only company on the list which increased the book value of equity for its shareholder over the 5 year and 1 year period. Going forward, JNPR is projected to grow at an annualized rate of 15% while CSCO is expected to increase its earnings at an annual rate of 8%. NTGR is predicted to grow at a measly rate of 2%.

Margins

After analyzing the growth rates, the next step was the evaluation of gross and operating margins of the 3 firms. The results are presented in the table below.

Margins

Averages

CSCO

NTGR

JNPR

Gross Margins

10 Year

65%

32%

66%

5 Year

63%

31%

65%

Last Year

61%

30%

62%

TTM

61%

30%

63%

Operating Margins

10 Year

24%

9%

8%

5 Year

21%

8%

14%

Last Year

22%

10%

7%

TTM

23%

9%

8%

As shown in the table above, although the gross margins of CSCO declined from an average of 65% over the past 10 years to 61% last year, the operating margins have remained steady at a respectable 23%. Both NTGR and JNPR report significantly lower margins than CSCO. However, the operating margins have been predominantly stable for the two companies.

Profitability:

To evaluate the profitability of the three companies, ROIC and ROA were selected as the desired metrics. Based on these metrics, JNPR appears to be a laggard with poor ROIC and ROA ratios. CSCO again leads the group with healthy ROIC and ROA numbers. NTGR's ROA did fluctuate during the past decade; however, it currently does sport an ROA closer to its historic average.

Operations

Averages

CSCO

NTGR

JNPR

ROIC

10 Year

16%

13%

3%

5 Year

13%

9%

6%

Last Year

12%

12%

2%

TTM

13%

11%

3%

ROA

10 Year

12%

8%

2%

5 Year

10%

6%

5%

Last Year

9%

9%

2%

TTM

10%

8%

3%

Valuation:

Having developed a good idea about the fundamentals of the 3 companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual companies and industry multiples. The table below presents the valuation analysis results.

Valuation

CSCO

NTGR

JNPR

Next Yr Est

$2.14

$2.88

$1.28

EPS Growth Rate

8%

2%

15%

Future EPS (5 Yr)

$2.95

$3.12

$2.02

Expected P/E

14

16

17

Price 5 Yrs Out

$41.26

$49.90

$34.31

Unlevered Beta

1.87

1.87

1.87

D/E Ratio

12%

0%

10%

Current Tax Rate

35%

35%

35%

Levered Beta

2.02

1.87

1.99

Risk Free Rate

2%

2%

2%

Risk Premium

6.00%

6.00%

6.00%

Size Premium

-0.36%

1.63%

0.62%

Cost of Equity

13.8%

14.9%

14.6%

Fair Value

$21.65

$24.97

$17.37

Current Price

$24.35

$32.89

$19.27

% Overvalued

11%

24%

10%

As shown in the table above, all the three companies are overvalued at current levels. NTGR is significantly expensive at current levels and is a short candidate in my opinion. I would sell any existing position in the three stocks and consider opening a short position in NTGR.

(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.)

Source: 3 Communications And Networking Stocks To Sell