Cisco Systems: Unwanted and Unloved

| About: Cisco Systems, (CSCO)
Funny things happen in the stock market. Sometimes investors and traders will get so scared, they throw the baby out with the bathwater.
Last week, the commentators on CNBC were talking about Cisco Systems (NASDAQ:CSCO). They decided buying now was like buying a falling knife. It was better to wait for a good quarter or good news to reverse the fall. Who wants to step in front of a speeding car going down a hill?
We suggest the stock is an obvious buy at $16 and change, but everyone is afraid of it. The stock recently hit a new 52-week low. In fact, the stock hit a new two-year low - it is trading for less than it has since March 2009.
Prior to 2009, CSCO hasn’t been this cheap since May of 2003.
Does it really deserve this bad treatment? In the 2003 fiscal year, CSCO had revenues of $18.9 billion, with net income of $3.6 billion, or $0.50 per share. Cash flow was $5.24 billion for the year. At the end of the year, the company had $20.7 billion in cash and cash equivalents.
Where is the company now? In 2011, analysts expect CSCO to earn $1.59 per share on sales of $43 billion. The company has $43 billion in cash in the bank. That is a 218% increase in profits on a 227% increase in sales and twice as much cash ... and the shares trade at the same price?
CSCO sells 50% of the routers sold in the world and 70% of the switches. The company says 85% of Fortune 500 companies use CSCO products. We use a CSCO wireless router in our small office. I dare say if you check your home, you may have one.
CSCO has $7.87 of cash on its books for every outstanding share. It is buying back stock and just instituted a dividend of $0.06 per share. The company’s products sell at almost a 60% gross profit margin. You can almost buy CSCO today for the cash on its books plus the sales per share for this year.
There are two reasons we can buy CSCO so cheap. Number one is Jon Chambers, the CEO. He built the company, but is under fire for missteps. The company has made some expensive mistakes. The other reason we can buy CSCO cheap is the company is maturing. It is not a growth stock anymore. It doesn’t command the high multiples of a company that is growing sales 50% or 75% per year. At today’s price, you can buy CSCO for 9.36 times earnings. That is more than 30% less than the earnings multiple of the S&P 500. That is cheap.
According to one report I saw, you won’t be the only one. Some of the biggest hedge funds are moving into CSCO this quarter. We should see it when they file their reports with the SEC later this summer ... but then everybody will want to jump on the bandwagon and take the stock higher.
That is the best time to sell.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours.