As certain members of Wall Street are cautioning investors to be wary of the market's hard-charging, upward momentum, I'm looking for companies that are trading at reasonable valuation multiples and have strong fundamentals to weather a potential market correction. The primary reasons I like Cisco (CSCO) are three-fold: (1) substantial and stable liquidity, (2) strong EPS and EPS growth, (3) a fair P/E ratio compared to its historical P/E multiple, as well as the P/E ratio of its primary competitors, and (4) a solid dividend yield accompanied by dividend growth and a manageable payout ratio.
Substantial & Stable Liquidity
CSCO has maintained relatively stable current and quick Ratios over the past three years (each year ending as of the last week of July for 2011, 2012, and 2013 respectively). Although the company's current and quick ratio have both dipped in 2013, the primary driving factor for this decline can be accounted for in the firm's increased short-term and current portion of long-term debt in 2013. I don't see this debt being a problem since CSCO has cash reserves in excess of $50 Billion and strong (and growing) cash flows from operations over the past three years (Balance Sheet & Cash Flow Statement provided below).
Common-Sized Balance Sheet
Cash Flow Statements
Strong EPS & EPS Growth
With EPS of $1.86 (Communications Equipment Manufacturer avg. of $1.88) and EPS growth of 24.83% (Communications Equipment Manufacturer avg. of -22.22%), CSCO seems in a good position to drive capital appreciation of its share price through relatively beaten-down but rising P/E multiples and continued earnings growth.
A Fair P/E Ratio
CSCO has a P/E (NYSE:TTM) of 12.64, which is well below the industry average of 42.46 for Communication Equipment companies. Currently trading below the firm's P/E (5 yr. avg.) of 15.99 with a PEG Ratio of 1.23, I expect the P/E multiple that CSCO trades at to increase over the next several years. This factor will be leveraged due to CSCO's continued, strong EPS growth.
Solid Div. Yield (+ Div. Growth and a Manageable Payout Ratio)
CSCO yields 2.90% and has increased its dividend by 21% this year alone. In addition, CSCO's dividend is not in danger of falling and its growth seems to be sustainable since the company is currently sitting on a pile of cash in excess of $50 Billion and maintains a payout ratio of only 33%.
In addition to CSCO's fundamentals, CSCO has recently launched exciting new technology that has the ability to increase the company's revenue and earnings growth even further and CSCO compares favorably to its primary competitors in terms of operating metrics.
New Technology (Application Centric Infrastructure [ACI])
On November 6th, Cisco unveiled its new Application Centric Infrastructure (ACI) aimed at creating an open ecosystem that will enable business applications to perform with unrivaled agility and flexibility.
To learn more about Cisco's ACI, as well as the leading tech companies that are supporting Cisco's ACI, check out: Technology Leaders Rally behind Cisco's Application Centric Infrastructure.
Industry Peer Comparison
CSCO trades at favorable P/E and P/S ratio compared to its direct competitors, as well as maintaining strong gross and operating margins-0.61 and 0.22 respectively.
**Source: Yahoo! Finance
I'm looking for the P/E multiple that CSCO currently trades at to begin rising steadily over the next several years. This factor, coupled with CSCO's strong operating metrics, new technologies that will allow them to benefit from the industry's move to cloud based business applications, will result in the company continuing to improve its already strong earnings, leveraging their rising P/E multiple.
I like CSCO as a long play with upside right now and for years to come.
Disclosure: I am long CSCO. 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.