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Summary

  • CSCO is fundamentally sound.
  • CSCO has significantly lagged the market overall for the past 12 months, but recently began to reverse this trend.
  • Investors can profit even if the stock does not break out of its current range.

Cisco Systems, Inc. (NASDAQ:CSCO) is a stalwart of the tech industry focused primarily on networking and other IT-related products and services. The company is a member of the DJIA, sports a market capitalization north of $130 billion, and operates across multiple continents. Although the company has significantly lagged most indices over the past year, forward looking analysis indicates a healthy potential upside.

By The Numbers

We can pull the numbers and charts below from many online resources, however I will use Google Finance and finviz.com as any beginning investor can access these resources for free.

Examining the 52-week price range, we see the stock is currently trading fairly close to the top of the range. However, we should note the high was actually reached back in August 2013 with a significant decline and subsequent increase since that time. So this is the second time in the past year the stock has traded in the $26 range. When looking at the average volume, we see about .5% of the total shares are traded on a daily basis. Remember the average will vary between sources based upon how it is calculated.

The TTM P/E is roughly 17.5 depending upon your source, but the forward P/E looks more positive at just over 12. For comparison purposes, the S&P 500 average current P/E is 19.5 and the average forward P/E is 16.4, indicating the market is currently discounting this company. Earnings are projected to grow 5-6% next year, which although positive, may actually serve to prevent excessive movements in the stock as investors seek out bigger growth stories and more rapid returns elsewhere in the tech segment.

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Cisco pays a quarterly dividend of 19 cents, resulting in a yield just under 3% at the current price. This compares favorably with the S&P 500 average yield of near 1.9%, but investors should take the company's dividend history into account as well. The company paid no dividend until 2011, but has raised the dividend over 200% since that time. While dividend raises are a positive indicator, future raises are not likely to be as large as seen in 2012.

Examining the balance sheet for trends over the past three years, we see the company has done well at growing assets faster than liabilities. Cash and short-term investments have increased almost 27% to over $50 billion, and total assets are up almost 25% to $101 billion. In contrast, total debt increased only 6% to $16.2 billion and total liabilities increased 14% to $42 billion. The company also reduced the share count by 266 million over the same time period. While there is some debate about the methods used to finance the buyback, the overall result is a decreasing share count.

Past Performance

While it is clear that we cannot make an investment decision looking only in the rear-view mirror, examining the past performance of a company does allow us to place the current analysis in a better context. In this example we will examine performance compared to the major indices over 5 years, 1 year, and 3 months in order to identify trends or significant events.

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The important takeaway from the five year chart is that the major indices left Cisco in the dust over that time period, with each returning near or over 100% as Cisco returned just over 26%. This does not mean that there was no money to be made in the company, or that anyone invested during this period made a "bad" decision. Money can be made during up, down, and sideways markets as long as you position your money properly.

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The one year chart paints a similar picture, with all indices easily beating Cisco's return of .35%. We can note the significant movement in the chart as correlated with earnings reports. The best example occurred in November 2013, when the CEO warned that the inconsistent global recovery would impact the bottom line. He revised estimates for the following quarter downward to 45-47 cents, and the market reacted accordingly. Earnings came in at 47 cents in February 2014, and beat estimates in May 2014 where we see prices increase abruptly. However, the damage for the year was already done as Cisco finished well behind the major indices.

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Tightening our window to three months shows Cisco slightly lagging the market until reporting earnings in May 2014. The earnings beat resulted in the corresponding price spike and subsequent price appreciation. The indices all increased as well, but were not able to close the gap.

Analyst Opinions

Investors should always make their own best decisions based upon all information available to them. So while analyst opinions should not be blindly followed, they should be considered as part of that available information.

At this time, 43 analysts are providing opinions on Cisco. Of those, only five have a underweight/sell opinion. Twelve have a hold opinion, and the remaining 26 have an overweight/buy opinion.

Potential Strategies

Even if the market continues to value this company at a discount compared to the rest of the S&P 500, there are methods for going long and increasing returns. In this particular case, a covered call option strategy would allow an investor to purchase shares and then write calls against them. The investor would immediately pocket the premium and wait until expiration when the shares are either sold or the option expires worthless (while collecting the dividend in the meantime). If the option does expire worthless, the investor is free to repeat the process.

As an example, at the time of this writing a Jan 2015 $27 call will provide a premium of 84 cents. So an investor could purchase 100 shares for $2591 and then receive $84 back for a net cost of $2507. Over the next six months the investor will also receive $38 in dividend payments, further reducing the cost basis to $2469. If the stock is trading below $27 in Jan 2015, the investor keeps the stock and decides what to do from there. If the stock is at or above $27, it will be sold for $27 to the owner of the option.

There is still risk to investors when following a strategy like this. The stock could experience a decrease in price greater than the premium already received. This would result in an unrealized loss in your account, although a smaller one than had you held a simple long position for the same time period. Depending on your broker and type of account, the rules will vary for when and how you can exit a position like this. Alternately, the stock could experience a significant increase in price well above the strike price the investor anticipated. Suppose that in our example the stock rose to $32. Leaving money on the table can frustrate anyone, but selling a $32 stock for $27 can really ruin a new investor's day. Investors need to thoroughly understand the trades they make.

Conclusion

At this point, Cisco appears to be slightly discounted with some room to appreciate as earnings increase over the next year. I do not anticipate any extreme movement in the stock price beyond what we have seen in the past related to earnings announcements and adjusted forecasts. However, even if the stock price remains relatively stable in the coming months, there are methods for structuring a position to profit based on general stability.

Good luck out there!

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I intend to open a long position in my personal account using stock and/or options in the next three trading days. Always remember to do your own homework before making a trade.

Source: Cisco Provides Stability, Growth And Dividends