Still Plenty Of Room For Cisco To Grow

| About: Cisco Systems, (CSCO)

A decade ago, Cisco (NASDAQ:CSCO) was a sweetheart of investors. The company was one of the major players in the notorious Tech Bubble (also known as the Dot Com Bubble) as it reached a market cap of $600 billion. Many speculators saw Cisco as a good candidate to become the first $1 trillion company, but it never happened. The market crash in 2002 caused Cisco's share price to fall from $80 to $13.

Investors still have bad memories of Cisco as the company has been underperforming the market for the last decade despite its strong fundamentals. Since the stock crashed a decade ago, the company grew its earnings by over 700%, however, the stock price appreciated by only 20% during the same period, looking almost flat compared to EPS growth experienced by Cisco.

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Similarly, the revenues and free cash flow increased by 140% and 157%, respectively during the same period. Obviously, the company is going through a phase where it has to prove itself to the market over and over again.

In 2011, the company went through a significant transformation and acquired a number of companies in its effort to keep its growth steady. Cisco has 2 main priorities, innovation and customer service. The company plans to get new clients by focusing on innovation and keep its current client base loyal by focusing on customer service.

Next Cisco

Starting this year, the company will call itself "Next Cisco" in order to emphasize the changes it is going through. Cisco will join many American companies in cutting costs in order to improve its margins. For 2012, the goal is to reduce expenditures by $1 billion by reducing the workforce. As the company gets thinner, its products will either have higher margins or become more affordable for clients. Either way, this should be beneficial for Cisco.

In addition, Cisco will reduce its exposure to projects with low margin in a new prioritizing effort. The company will start focusing more of its investments in projects with higher yield. Some of the low yielding projects will be cancelled completely, others will see some reduction. As an initial result, the company was able to move $200 million from low priority projects to high priority projects in 2011 and the trend is likely to continue in the following years.

In an effort to increase productivity, decision making process and innovation, the company moved things around in its structure in almost every of its departments including sales, engineering and operations. The new organization will increase accountability within each department to ensure that the best effort is put forward to meet the goals.

Returning Capital to Investors

The company spent $7 billion in 2011 in the shape of dividends and stock repurchases. Last year, in a letter to shareholders, Cisco announced that it is committed to keep its dividend and stock repurchase programs running for the foreseeable future. Although the company's current dividend yield is only 1.58%, it is likely to increase in the near future.


In 2011, Cisco Acquired BNI Video, Versly, AXIOSS Software and Talent, NewScale, Inlet Technologies and Pari Networks. In 2012, Lightwire joined ranks of these companies. These acquisitions were all part of a strategic plan and they will contribute to the company's growth in the future.

Acquisition of BNI Video will help improve Cisco's video platform called Videoscape TV. BNI's main products are already aligned well with Videoscape TV as the two companies had a partnership lasting for years. Now Cisco's clients will be able to switch to Videoscape from their current video infrastructure without much hassle.

Versly was another wise acquisition by Cisco. Versly's main product is able to supplement Microsoft Office applications in a way that allows users to collaborate in these applications by utilizing social software, instant messaging and web conferencing.

The acquisition of AXIOSS is important because it will improve Cisco's service management, particularly Cisco Prime product as this company's products are already integrated with Cisco Prime. AXIOSS was one of the more accomplished companies in the software service management industry prior to the acquisition.

Acquisition of NewScale will help Cisco gain market share in the segments related to Cloud. NewScale's software product allows businesses to integrate their systems with cloud services. As cloud becomes more and more prevalent in the business world, the need for integration and deployment of these systems become more crucial for companies.

Similar to BNI Video, Inlet Technologies will also help improve Cisco's own videoscape TV product. This integration will allow users to broadcast their video content and share it over multiple devices and multiple networks. This is also a growing market as the globalization increases focus on virtual teams where communication is not face to face.

Pari Networks specializes in products that enhance Network Configuration & Change Management and Compliance Management in client companies. Cisco currently operates "smart services" which include monitoring and ensuring stability, strength and health of networks used by the clients. The products of Pari Networks will integrate with Cisco's smart services to allow Cisco to offer better services to its clients.

Acquisition of Lightwire will help Cisco's high-speed networks and integrate them with optical connectivity, which is a specialization of Lightwire. Cisco will be able to meet its clients' ever-growing data demands much easier with the help of Lightwire.

Future Demand

There is very strong demand for Cisco's products and services all over the world. The company's growth will be driven by the cost cutting reorganization, emerging markets and new trends in the developed markets such as the cloud. Cisco has a strong cash position and the company is actively looking for acquisitions to make in order to keep its growth steady. In 2012, the company is expected to see an earnings growth of 16% and over the next 5 years, the company is expected to see annual earnings growth of 9%.

P/E Analysis

The company's current P/E ratio of 15 is lower than its 10 year average P/E ratio of 26.01, its 5 year average P/E ratio of 18.47 and its 3 year average P/E ratio of 17.78. Its future P/E ratio is expected to be even lower, 12 by the end of 2012, 11 by the end of 2013 and 10 by the end of 2014.


I believe that Cisco is one of those companies that's punished by investors for little to no reason. The company is definitely more appreciated by investors now than it was a few months ago, but there is still plenty of room for Cisco to grow. I wouldn't be surprised if Cisco's share price appreciated by 10-15% in the next year. I recommend Cisco for growth investors with little risk appetite.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.