Can Cisco Continue Its Excellent Run?

Aug.16.13 | About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO) has appreciated by about 34% in the last one year. The company's accelerated sales have created shareholder value and generally left the market with a nice impression of its CEO John Chambers. Thanks to favorable conditions, the company recorded a revenue increase of 6.2% in the last quarter compared to the same period in 2012. Its EPS rose 16.7% year-on-year, while its net income rose 18.4% compared to the same period last year.

Expectations for 2014 come to a consensus of $2.24 in earnings per share, which implies a forward P/E of 10. Even the lowest forecast from analysts used in the consensus predicts earnings of $1.92. It is clear that the justification for Cisco's future projection is based on earnings growing at a slightly more improved rate. The consensus earnings growth rate for the next five years is 9.10%. If we compound that over five years, and apply the resulting growth to the consensus forecast for 2014, we get a low earnings per share for 2018. We think Cisco's estimated earnings is too low at the present growth rate.

Hedge fund

As at the end of March, 74 hedge fund managers were shareholders in the company, down from 82 same period last year. But about 20 managers had at least 1% of their portfolio invested in the company. The list of bullish managers include Steve Shapiro, Sandy Nairn, Russel Hawkins and Donald Yacktman.

While insider sales have been 99 since 2009, only 3 insider purchases were made in the same period. However, all insiders remain substantial shareholders in the company. They must have seen great future prospects for the global networking giant. Needless to say, Investors who imitate insiders have the possibility of achieving good returns.

Comparing the company to competitors

Cisco's competitors include Hewlett-Packard (NYSE:HPQ) and Juniper (NYSE:JNPR). At a beta of 1.4, Cisco is less risky than Hewlett-Packard (1.67) and Juniper (2.26). At a P/E of 13.71, it is cheaper than Juniper with a P/E of 35.13. At a profit margin of 20.11% and operating margin of 22.31%, Cisco is in a position to give better returns than its rivals. Juniper has a profit margin of 6.74% and an operating margin of 11.64%. Hewlett-Packard has a profit margin of 11.60% and an operating margin of 7.93%. At 7.10%, Cisco gives a more favorable return on asset than Hewlett-Packard (4.90%) and Juniper (3.24%). Cisco also gives a better return on equity at 17.80%, compared with - 40.80% for Hewlett Packard and 16.95% for Juniper.

Another of Cisco's competitor is Alcatel Lucent (ALU). At a beta of 2.54, a profit margin of -18.10%, an operating margin of 10.79%, and a return on asset of 0.73%, Alcatel Lucent has inferior price multiples than Cisco. At an EPS growth rate of 9.10% in the next five years, Cisco will be more profitable than Hewlett Packard (1.67%) and Alcatel Lucent (-26.40%). Only Juniper at 14.14% will show a greater EPS growth. At a forward earnings of 10.62, Cisco will be cheaper than Juniper (15.21) but more expensive than Hewlett Packard (6.98).

Analysts

Recognizing potentials of the stock, ISI Group upgraded it on a price target of $22 a share. J.P. Morgan also upgraded the stock on a price target of $26.00 a share, up from $18 a share. However, Standpoint Research downgraded the stock. A noted analyst, Jim Cramer, says Cisco is a buy on the sell-off and he would look to purchase the shares in the $22 to $23 range. FBR Capital upgraded the stock

Macroeconomic Environment

The networking and communications industry has a bright future. Products such as data centers and carriers and switches are popular. According to IDC, an industry analyst, the data center market is expected to grow from $3.2 billion in 2010 to $16.9 billion in 2015. Additionally, a research firm, Infonetics Research, predicts that the carrier router and the switch market will grow by 8% annually from now until 2017.

Conclusion

Cisco is the market leader in an industry in which size matters. Its quality products, extensive network, and brand popularity give it a solid competitive advantage over peers and rivals.

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.