It is always a nice problem to have when you have been on the sidelines with cash and are now looking desperately at where to put it but it’s a double-edged sword. While having the cash is nice, making the wrong investment decisions can prove worse than if you had stayed on the sidelines. But where’s the fun in that? My next door neighbor is in that exact situation. I made the mistake and stepped out of the house to move my sprinkler at the exact time he was pulling into his driveway and I was immediately kidnapped with investment questions, with the standard one being “where should I put my money?"
The first stock that I thought about was Cisco Systems (CSCO). Now, before you get all bent out of shape let me explain. This is not a “Cameron emotional attachment” bit. There is evidence of a turnaround here and I think many of you blinked and might have missed it. The struggle that potential Cisco investors have today is in trying to decide whether the stock is a value play at current levels or a value trap? We all know that I have been extremely loyal to Cisco as well as extremely critical; to the point where I called for the resignation of John Chambers, its CEO; a request that he has declined. So in exchange, I asked for more money by way of an increase in dividend. So far there has been no response but I’m optimistic that one is on its way.
Is it a value trap or a value play?
It is tough to not value Cisco; a company with such strong fundamental standing. The stock price neither reflects its market share status nor fundamentals. If we look deep into the numbers, we can see a company that trades at attractive valuation multiples. It stands solidly with a market cap of $87 billion as well as 58 billion in EV and trades at a modest forward P/E of 9. How can a company with $43 billion in cash not be considered, especially one that has amassed almost $10 billion in free cash flow each year? One can argue that there is no other company who has been able to leverage its balance sheet better than Cisco.
Cisco’s challenge continues to be its perception. Over the past several months, investors have sold off portions of their holdings as a way to minimize their exposure in the stock while they try to assess what is going on within the company. If the company can wisely reinvest its capital to create more innovative ways to compete, I feel investors, patient or not, will be rewarded handsomely. Because at the current level that the stock is trading, I see an opportunity for those who are looking for value and are willing to be patient to realize some significant gains.
Reason for optimism
Cisco recently announced plans to enter the tablet computer market by the end of July. Before you raise your eyebrows, just remember that it also caught investors off-guard when it announced a couple of years ago that it was entering into the server business; it has managed to make it work.
As critical of the company as I have been, I am more than willing to give Cisco the benefit of the doubt here; the truth is I don’t really have a choice in the matter. The device is said to have 7-inch screen and runs on Google’s (GOOG) Android platform. Early indication is that it will only be available to corporate customers, according to Tom Puorro, a director at Cisco.
Application capabilities include:
- Wi-Fi (802.11a/b/g/n), 4G data, and Bluetooth help employees stay connected while mobile.
- HD video (720p) including interoperability with Cisco TelePresence systems with the EX Series provide lifelike video communications with the simplicity of a phone call.
- Virtual Experience Infrastructure thin-client integration enables highly secure access to cloud-based business applications.
- Cisco AppHQ delivers access to secure transformative business-process applications.
- Collaboration applications include Cisco Quad, Jabber IM, and Presence as well as integrated, one-click access to WebEx meetings.
Tablet highlights include:
- Cisco Compatible Extensions powered wireless communications device, optimized to work with a Cisco Wireless LAN infrastructure.
- 7-inch diagonal, high-resolution color screen with contact-based touch targets for an elegant, intuitive experience.
- Optional HD media station with USB peripherals, 10/100/1000 wired connectivity, and a handset option.
- Detachable and serviceable battery for easy recharging.
- Highly secure remote connections with Cisco AnyConnect Secure Mobility Client.
- HD audio with wideband support.
I recall when Cisco first made the decision to enter the server market. The incumbents in that space quickly responded by denouncing and discounting the strategy. In a span of just two years, their Unifies Computing System started outpacing market growth for x86 blades and Cisco now has become the #3 player worldwide in x86 blade server revenue. So I would not bet against their ability to be viable in the tablet space just yet.
In a speech to Cisco employees, John Chambers once said the following:
No one has Cisco's breadth of innovation, the scale and reach of our customer delivery model or our talent and experience of our employees. Cisco's value to our customers is differentiated, and it is very simple. We are globally delivering to them a network-centric platforms that make them more competitive and allow them to achieve their business goals.
The recent success of the blade servers is evidence of the quote above by John Chambers and Cisco’s ability to still deliver. Clearly the company is able to execute in a relatively new area yet it has been tagged for its lack of execution; especially by me. But when deciding whether the company is a value play or a value trap at current levels, I can only see value and a $20 target; and that was exactly what I told my neighbor.