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Summary

  • Cisco's peers Intel and Microsoft are at ten-year highs, and Cisco isn't.
  • Cisco trades at a massive discount on forward earnings estimates when compared to its old-school tech buddies.
  • Earnings estimates for 2015 are creeping back up slowly.

The last time I wrote about Cisco Systems, Inc. (NASDAQ:CSCO), I stated, "Due to the expensive valuation on growth potential, overbought technicals and the equal risk/reward ratio, I'm not going to be putting additional capital to work in the name right now." Since writing the article, the stock has increased 1.01%, versus the 2.58% gain the S&P 500 (NYSEARCA: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 May 14, 2014, the company reported fiscal third-quarter earnings of $0.51 per share, which beat the consensus analysts' estimates by $0.03. In the past year, the company's stock is up 2.86% excluding dividends (up 5.18% including dividends), and is losing to the S&P 500, which has gained 22.92% in the same time frame. Since initiating my position back on May 21, 2013, I'm up 8.95% inclusive of reinvested dividends and dollar cost averaging. 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 right now is a good time to purchase more of the stock for my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 17.03, which is fairly 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 11.61 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.16 per share, and I'd consider the stock inexpensive until about $32. The 1-year PEG ratio (2.99), 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 fundamental metrics for the company when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next Yr. ($)

Target Price ($)

PEG

EPS Next Yr. (%)

02Oct13

23.24

12.49

10.32

2.25

34

1.60

7.80

03Nov13

22.57

12.13

9.97

2.26

34

1.63

7.45

03Dec13

21.26

11.55

10.13

2.10

32

2.03

5.69

04Jan14

21.98

11.95

10.56

2.08

31

2.25

5.31

03Feb14

21.55

11.71

10.34

2.08

31

2.16

5.41

03Mar14

21.57

14.28

10.27

2.10

32

2.58

5.53

03Apr14

23.09

15.29

10.98

2.10

32

2.74

5.58

03May14

22.94

15.19

10.89

2.11

32

2.63

5.77

02Jun14

24.78

16.86

11.51

2.15

32

3.07

5.49

02Jul14

25.03

17.03

11.61

2.16

32

2.99

5.69

Financials

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 3.04% with a payout ratio of 52% of trailing 12-month earnings, while sporting return on assets, equity and investment values of 7.8%, 13.7% 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 3.04% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 4 years. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

02Oct13

2.93

37

10.3

17.8

13.2

03Nov13

3.01

37

10.3

17.8

13.2

03Dec13

3.20

37

10.2

17.2

13.2

04Jan14

3.09

37

10.0

17.2

13.2

03Feb14

3.16

37

10.0

17.2

13.2

03Mar14

3.52

50

8.2

14.2

13.2

03Apr14

3.29

50

8.2

14.2

13.2

03May14

3.31

50

8.2

14.2

13.2

02Jun14

3.07

52

7.8

13.7

13.2

03Jul14

3.04

52

7.8

13.7

13.2

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock nearing overbought territory, with a current value of 66.25. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is about to cross above the red line, with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($25.03), I'm looking at $25.38 to act as resistance, and $24.62 to act as support, for a risk/reward ratio which plays out to be -1.64% to 1.40%.

Can Cisco Move On Up?

Cisco has made quite a gain year-to-date, but overall, it has lagged the broader market for the past five years. With the market at all-time highs, I don't think this is a name that will get hammered if the market takes a tumble. Other old-school tech stocks such as Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) are at ten-year highs, and Cisco has just languished. It just hasn't gone anywhere to be able to make a move down, so this might just be a safety play. For comparison purposes, Cisco is trading a lesser earnings multiple than Intel and Microsoft, in addition to having a higher long-term growth rate. It's high time that Cisco catches up to its peers. Cisco has bought back roughly $8 billion of stock this year alone, and pays a higher dividend than its peers.

Ticker

Fwd P/E

5-yr. PEG

EPS next 5 yrs.

Dividend

ROA

ROE

ROI

CSCO

11.61

2.21

7.70

3.04

7.8

13.7

13.2

INTC

14.70

2.45

6.80

2.91

10.5

16.9

12.8

MSFT

14.58

2.32

6.78

2.67

15.1

26.9

22.6

The company has been on a buying spree in the past ten days, having purchased Assemblage and Tail-f Systems to support its product offerings. Assemblage provides web-based online meeting apps that integrate with a variety of third-party cloud services. Cisco is should be trying to weave the company into its WebEx platform for synergies. Tail-f is a provider of network orchestration software carriers, which can be used to enable SDN implementations but can also work with more other networks.

Conclusion

The company recently declared a $0.19 per share quarterly dividend with an ex-date of 2nd July, '14 and a pay date of 23rd July, '14, for a forward yield of 3.06%, and is the main reason why I bought a smaller batch than usual today. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates, but expensive growth expectations and next year's earnings estimates have started to increase again. Financially, the dividend is great, but the efficiency ratios have dropped off a little from last quarter. On a technical basis, the risk/reward ratio is about equal, but I think it will continue to move up before it moves down. Like I said, I only bought a small batch this time around, only for the dividend. I'd really like to see how it reports this coming quarter before buying bigger batches.

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!

Source: Cisco Is Beating The S&P 500 This Year, But It Is Still A Laggard