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Cisco (NASDAQ:CSCO) is the worldwide leader in networking. The company was once one of the world's largest companies during the dot com era. The stock has gained nearly 25% this year and is poised to go higher, while the NASDAQ has gained 15% so far this year. The stock's impressive dividend yield, revenue growth, and free cash flow make it a very attractive investment opportunity.

(click to enlarge)

source: Yahoo! Finance

Company Summary

Cisco has a diversified business model that includes a wide array of products. The industry is rapidly changing, but Cisco is currently undergoing major transitions. The company's long term strategy, which is focused on intelligent networks and technology, will fuel the company's success over the long run. Cisco has managed to prosper over the past few years, despite macroeconomic uncertainties that we have seen over the past few years. For example, in 2012 the company grew its EPS at more than twice the pace of revenue for the fiscal year. Cisco is currently transitioning and one of the things with Cisco that could change in the near future is its CEO. The CEO of Cisco is 64 year old John Chambers. CEO John Chambers has been with the company for 18 years and he is expected to retire soon. Rob Lloyd, president of development of development and sales, is rumored to be the next CEO of Cisco. Another key transition that company is undertaking is the transition towards programmable, flexible, and virtual networks.

Fundamentals

Market Capitalization$128.8 billion
TTM P/E Ratio13.41
Forward P/E Ratio11.47
Price to Book Ratio2.28
Free Cash Flow$2.8 billion
Dividend Yield2.8%

The stock has strong fundamentals. The P/E ratio of 13.41 is much below the industry average P/E ratio of 15. Also, the P/E ratio is much lower than the P/E ratio of many aging tech blue chips like Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and Qualcomm (NASDAQ:QCOM). The TTM P/E is well above the forward P/E ratio of 11.47. The P/B ratio of 2.28 is below the industry average P/B of 3.8. The company's free cash flow is an impressive $2.8 billion. Free cash flow for the company was in the billions even during the financial and has remained positive since. The company's cash will help to sustain its dividend growth and buybacks. The company grew its EPS by 15% from Q1 2012 to Q1 2013. The company grew its revenues by 5.42% from Q1 2012 to Q1 2013.

Earnings Conference Call

On May 15, Cisco reported a suprise earnings beat and the company beat the expectations for both the top and bottom line. Cisco said in the earnings conference call that earnings rose more than 14% in the first quarter. Many were expecting the company to report weak earnings because of the transition to new technology. However, change didn't impact the company. CEO John Chambers said that, "change has always been very good for the company." In the first quarter the company's data center revenue growth was up 77%, wireless was up 27%, and SP Wi-Fi up well over 100%, and SP video was up 30%. Also, for the first time in 6 quarters the company delivered positive growth across all four customer segments. The most important takeaway from the performance in the U.S. and emerging countries. Growth in the U.S. and emerging markets were both in the double digits.

Dividend Yield

One of the more attractive aspects about this stock is its dividend yield, which is currently at 2.8%. On August 15th 2012, Cisco announced a 75% increase in its dividend payout. Until Cisco's announcement last fall, Intel was the biggest dividend play in the tech sector. The company continued to raise its dividend until it reached its current level at .17 cents a share. Although Intel still has a much larger dividend yield at 3.7%, Cisco's yield is now much more competitive. The massive boost in the dividend yield will certainly bring new investors to the stock and the hike will raise the company's profile among money managers that look for decent yields.

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source: chart from Y Charts

Competitors

Cisco is the dominant player in the networking industry. The company's three largest direct competitors are HP (NYSE:HPQ), Alcatel-Lucent (NYSE:ALU), Juniper Networks (NYSE:JNPR). Cisco has the highest net income and revenue compared to its competitors. In addition, Cisco's P/E is lower than its competitors.

Conclusion

Cisco is a solid company that is able to adapt to changing conditions. The technology industry is changing at a faster and faster rate, yet Cisco has managed to keep up with these. Despite negative sentiment, the company reported a very strong first quarter. The company has grown its dividend substantially over the past year and this dividend is certainly sustainable. The stock's impressive fundamentals make it a buy.

data from Y Charts and Yahoo! Finance

Source: The Long Case For Cisco