In a previous article, I told readers why they should consider Cisco (NASDAQ:CSCO) as a buying opportunity. I suggested that investors ought to distinguish between the company and the stock. I said this for several reasons, but particularly because readers often associate or mistake Cisco’s languishing stock with its standing among the leaders in technology -- a notion that is simply not true.
I read a very compelling article this weekend, one that made a great case for how Cisco can reverse its fortunes. In the article, I was reminded of a famous quote by Cisco’s CEO John Chambers where, in November of 2001, he defiantly proclaimed: "We will probably gain more market share during this economic slowdown than we ever have."
I remember that statement vividly, as if it were yesterday. In fact, during the fourth quarter of 2001, I was close to pulling the trigger on what I thought were extremely depressed share prices of Cisco. The stock traded then at $17; imagine that. Almost 10 years later and it appears it has not moved.
I have been highly criticized for my loyalty to the stock. I even admitted that I was somewhat emotionally attached to the stock, and called my patience “virtuous.” But I'm beginning to realize that my reward for being long Cisco over the years may not be realized for quite some time. Admittedly, it may be my frustration speaking, but I have become concerned over what other opportunities I might have missed by being so stubborn. One reader suggested:
I agree, these bullish articles are tantamount to selling snake oil to investors. New 52-week low today, it's underperformed the broad market and I would expect that if the market corrects we will see CSCO at new 52-week lows. I don't understand how anyone who owns CSCO can be happy and pump up this stock like this author.
I found some humor in his statements. I responded by saying that my next Cisco article would suggest that readers dump the stock, so I hope he’s not disappointed. The idea that Cisco is somehow considered a “failure” continues to boggle my mind. Sometimes I wonder if I am the only one to see the unrealized value in this company; one whose equipment still powers more than half the Internet. But to be fair, the reader was not entirely wrong. There have been plenty of opportunities for me to dump the stock or at least cut some of my losses. I’m sure there have been plenty of other stocks that could have performed much better during that span, or at least mitigate some of the languishing portions of my portfolio.
Chambers said the company plans to “slim down” and “tighten its focus” on its core areas in an attempt to get profits growing again. Critics have called the company too scattered in its efforts while it faces tough competition in core products, such as its routers and switches. To be clear, Cisco is still a profitable, growing company. It's not going away anytime soon. Granted, it is no longer the tech behemoth that was once the darling of Wall Street, but it is far from extinction.
The company has acknowledged multiple mistakes while suggesting it would take time to fix them. Turning things around will be complicated by Cisco's deep reliance on government sales. Last year, Chambers revealed that government customers account for 22 percent of its revenue, up from a range of 15-20 percent in 2004. While federal spending on technology surged during the dot-com bust and helped offset declines in the private sector, these days governments of all stripes are struggling with chronic budget problems.
"We have seen significant declines in the growth rate of our public-sector business since the beginning of our fiscal year," Chambers told analysts during a conference call last month. "No excuses. We must adjust quickly; we are, and we will."
Emotional attachment or not, I continue to believe that the company can and will be able to adjust and turn things around, and I am not alone in this thinking. In a research report, Shaw Wu at Sterne Agee said he had separately analyzed the value of Cisco's major segments: Routers, switches and a variety of "new products" and services. Adding them back together he arrived at a value of $27 to $28 per share, even when discounting the price-to-earnings ratio compared to its competitors. "We believe the (Cisco) story is getting better and we'd rather be a buyer at these depressed levels than wait for obvious evidence of improvement. By then it may be too late," Wu wrote.
When one looks at Cisco from a fundamental perspective, one will see a company with $25 billion of net cash that trades at nine times earnings (excluding net cash). Cisco has also provided double-digit returns on capital, and is a dominant player in the industry poised to grow at a faster rate than the economy. Fundamentally, the company is strong. Cisco grew at a rapid rate primary due to its string of acquisitions during Chambers’ tenure. Though the company is now striving to return to its core business -- a move that I am entirely in favor of -- I think it might require one more strategic acquisition to spur the growth that investors have been looking for.
Disclosure: I am long CSCO.