The last time I wrote about Cisco Systems, Inc. (CSCO) I bought a bigger batch than usual stating there was immediate upward pressure on the stock. The stock did indeed move upwards to the tune of 6.34% since the article was published and then it hit a brick wall in terms of the earnings report on the afternoon of 13Nov13. Since the last article it actually is down 5.78% versus the 1.89% gain the S&P500 (SPY) posted. Cisco designs, manufactures and sells internet protocol-based networking and other products related to the communications and information technology industry and provides services associated with these products and their use. On November 13, 2013, the company reported fiscal first quarter earnings of $0.53 per share, which beat the consensus of analysts' estimates by $0.02. In the past year the company's stock is up 12.43% excluding dividends (up 14.65% including dividends), and is losing to the S&P 500, which has gained 26.76% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the technology sector of my dividend portfolio.
The company currently trades at a trailing 12-month P/E ratio of 11.55, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 10.13 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.1 per share and I'd consider the stock inexpensive until about $32. The 1-year PEG ratio (2.03), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 5.69%. Below is a comparison table of the fundamentals metrics for the company from the time I wrote the last article to what it is right now.
EPS Next YR ($)
Target Price ($)
EPS next YR (%)
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 3.2% with a payout ratio of 37% of trailing 12-month earnings while sporting return on assets, equity and investment values of 10%, 17.2% and 13.2%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.2% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for the company from the time of the last article to what it is right now.
Payout TTM (%)
Looking first at the relative strength index chart [RSI] at the top, I see the stock waffling around near oversold territory with a value of 37.58 with no trajectory. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height, indicating a bullish pattern. As for the stock price itself ($21.26), I'm looking at $22.01 to act as resistance and $20.01 to act as support for a risk/reward ratio, which plays out to be -5.88% to 3.52%.
- On 13Nov13 the company announced fiscal first quarter earnings of $0.53 per share on revenue of $12.1 billion versus expectations of $0.51 per share on revenue of $12.35 billion. It was not the earnings that were bad; it was more of the guidance which was horrendous.
- The company guided fiscal second quarter revenue 8-10% lower with EPS in the range of $0.45-$0.47. Both these are well below the 4.1% revenue increase and EPS of $0.52 which were expected. I believe this may be a reaction the company had to take to throw out the baby with the bath water because of the uncertainty due to the Snowden Sucker-punch received. Countries all over the world are afraid of purchasing American IT equipment in fear of espionage.
- It did not take a day after earnings before three analysts downgraded Cisco. Deutsche (DB) cut the company down to "hold", Wedbush lowered Cisco to "neutral", and Goldman (GS) dropped Cisco off its conviction buy list.
Cisco is definitely a laggard for the year only up 8.2%, but the company added $15 billion to its buyback plan. The company is getting its butt handed to it in the form of competition from the likes of Palo Alto Networks (PANW) and Juniper (JNPR) and in the form of a harsh macroeconomic environment. I don't believe the handsome salary CEO John Chambers received recently is warranted considering the stock is only up 8.2% on the year. Keeping that in mind, I believe the stock is inexpensively valued based on future earnings, but is expensively valued based on growth potential. Financially the returns on assets and equity dropped a bit but are still good. On a technical basis I would have said that I'd expect the stock to trend upwards for the short term because I believe it was completely oversold. Yes the fundamentals and financials deteriorated a bit, but what I like about the stock for now is that it is inexpensively valued on future earnings, has a great dividend, and has bullish technicals; it's for these reasons I will be adding another big position now.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!