Although Cisco (CSCO) is the obvious giant of the networking world, its shares have been in a funk over the past decade. During this same time frame, the networking industry has matured, allowing competitors like Hewlett-Packard (HPQ) and Juniper Networks (JNPR) to enter the market and start to chip away at Cisco’s market share. Cisco has responded by looking for opportunities to expand into other markets. We’ll take a look at these companies to see how Cisco may or may not fit into your portfolio. Please use this analysis as a starting point for your own research.
Cisco’s shares recently traded around $18, near the middle of its 52-week range of $13.30 to $22.34. Share prices for both Hewlett-Packard and Juniper were recently within 20% of the bottom of their respective 52-week trading ranges. Lately, Hewlett-Packard’s shares were near $27, and have traded between $21.50 and $49.39 over the past year. Juniper’s shares dipped below $22 recently, while its range over the past 52-weeks has been between $16.67 and $45.01. Of these three companies, Cisco is by far the largest, with a market capitalization of $97.09 billion. Hewlett-Packard comes in second at $53.37 billion. Juniper is the smallest at $11.48 billion.
Over the past twelve months, Cisco has posted net income of $6.34 billion, giving it earnings per share of $1.16. Hewlett-Packard’s net income of $9.37 billion resulted in earnings per share of $4.26. Juniper’s net income over that period of $519.21 million equated to $0.95 in earnings per share. While both Cisco and Hewlett-Packard pay a dividend, Juniper does not. Cisco pays out $0.24 per share, yielding investors 1.30%. Hewlett-Packard yields 1.70% by paying $0.48 per share.
With the discrepancies in income, it comes as no surprise that the price to earnings (P/E) ratios of these companies also vary widely. Hewlett-Packard came in at 6.41, while Cisco came in near the industry average with 15.96. Juniper was considerably higher than the others at 23.95. Dividing the P/E ratio by the expected growth rate (PEG) gives investors an easy method to determine whether a company’s stock price is over or undervalued. A PEG of 1 indicates that shares are trading in line with the expected growth rate. Undervalued stocks have a PEG less than 1 and overvalued stocks have a PEG higher than 1.
Hewlett-Packard, with a PEG of 0.76, is undervalued, compared with expectations. The PEG ratios of Juniper and Cisco--Juniper’s is 1.23 vs. Cisco’s 1.26— imply that both companies are overvalued. Speaking of growth, the year over year quarterly revenue growth rate of these companies is all over the map. On the high end, Juniper has grown its revenue at a rate of 9.2% over the past year. Cisco has seen revenue growth of 4.7% and Hewlett-Packard grew its revenue by 1.5%.
Cisco has been operating efficiently over the past year. It has posted a gross margin of 61.42% and an operating margin of 20.15%. Juniper experienced a gross margin of 65.61% compared to its operating margin of 16.46%. Hewlett-Packard’s margins are significantly lower than those of Juniper and Cisco, with a gross margin of just 24.23% and an operating margin of 10.15%. In its defense, Hewlett-Packard has exposure to other hardware industries, thus making a true comparison somewhat difficult.
Since the early 1990s, Cisco has had the acquisition bug. It has acquired almost 150 companies, primarily focusing on local-area networking (LAN), voice over internet protocol (VOIP) and security. Hewlett-Packard has a much richer, and longer history than Cisco. Established in the 1930s, Hewlett-Packard is more identified as a PC company. Like Cisco, it has pursued a similar strategy of differentiation. Ultimately, it is this expansion that led Hewlett-Packard into the networking arena. Juniper is the purest networking company of the three. It is focused on upgrading networking equipment from outdated technology to newer and faster methods of moving data over the internet.
While Hewlett-Packard is certainly a worthy investment, of the three, it is the least attractive. It has the lowest PEG ratio, indicating that it is undervalued, but it has been experiencing some confusion recently due to some changes at the top of the company. (It is on its third CEO in the last year.) The new CEO, Meg Whitman, should help move Hewlett-Packard from its current hold status. While both Cisco and Juniper are both overvalued, each is worthy of an investment today. Juniper’s focus has allowed it to become something of a cash cow. As mentioned before, the areas Cisco has been differentiating into—LAN, VOIP and security-- are all turning out to be lucrative. This gives Cisco an edge since it can offset uncertainty in any of its markets with growth in the others.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
