Cisco: The Long Case For The Rest Of 2012

| About: Cisco Systems, (CSCO)

The technology sector is continuously changing, and investors are always looking for the next best stock. Network giant Cisco Systems (CSCO) continues to be a strong player in the field, competing with the likes of Dell (DELL) and Hewlett-Packard (HPQ). Deciding whether Cisco is the best investment among the three is the result of looking at the performance of each company as well as its stock.

Concentrating its business in solutions for corporate, small business and home customers, Cisco offers products such as routers, switches and modems for Internet communications. While the company built its reputation on its switching equipment, the company has broadened its reach and expanded into new areas, as evidenced by CLEO (Cisco router in Low Earth Orbit) and IRIS (Internet Routing in Space).

These technologies have given Cisco an advantage as the Internet and mobile communications grow and expand. The technology helps to eliminate the repeaters and incorporate IP routers, making it more powerful and less expensive. These advances and other also make Cisco an excellent investment.

The company continues to generate solid financial results, as evidenced by its 10.8% quarterly revenue and 43.5% earnings increases in the 4th quarter. I especially like the fact that the company is generating revenue and has almost three times more cash ($47 billion) than it has total debt ($17 billion). This tells me that the management team knows how to turn a profit without overspending.

Dell is another tech company that has managed to turn success in the marketplace into profits for investors. Best known as a computer company, Dell has been working to transform itself to into a provider of software and network equipment as well, as evidenced by its PowerEdge servers and its line of network switches.

In addition to its product line, Dell continues to use takeovers and acquisitions to build its capabilities. Dave Johnson, the company's VP of Corporate Strategy, has recently made a number of acquisitions with the purpose of turning Dell from a distribution to a technology company. While the company has lost the number-one position in computer sales to Hewlett-Packard, Dell has been growing due to its new approach.

This strategy has also translated to success on Wall Street as well. After growing its share price over 11% in the past year, Dell is on pace for nearly a 20% gain in share price this year.

Although it does not pay a dividend, the company has done a good job of keeping investors interested by being financially smart. I like the fact that, while its debt to equity is higher than its competitors, Dell has more total cash than it has debt. Managing to maintain fiscal stability while reinventing itself, Dell is looking good.

Benefiting from Dell's decision to refocus its corporate efforts, Hewlett-Packard has managed to prosper while re-inventing itself. Hewlett-Packard has jumped to the top spot in the computer industry, selling more laptops than any other company does. However, the company is also finding new areas where it can excel.

Although it specializes in hardware, Hewlett-Packard has been venturing into software solutions as well. This move has led the company to develop software as a service, cloud computing solutions, education and support services.

The cloud-based software and data storage is becoming an increasingly important part of the tech sector. Hewlett-Packard has been active in this area, offering its HP CloudSystem as a way that companies can improve resource utilization while making corporate information more readily available to employees who are in remote locations or traveling.

The growth at Hewlett-Packard has not been lost on the watchful eyes of Wall Street. Although its share price has taken a beating over the past year, both its price to earnings and price to book ratios suggest that it is now undervalued. The company recently raised its yield from 2% to 2.1%, and its low payout ratio of 15% suggests that it should have no problem maintaining its dividend.

While each of the three companies has solid points in its favor, I still like Cisco the best among this group. Both Hewlett-Packard and Dell are looking to capitalize on cloud computing, Cisco has done a great job of getting ahead of the curve, thanks to its satellite-based applications for improving communications. As more people utilize laptops, smartphones, tablets and other devices, data transfer speeds will become more important, and Cisco will be the leader in the field.

Hewlett-Packard has done well with some recent reorganization, bringing respected executive Meg Whitman to run the company. Although its low price to book might entice investors to get in, I am concerned about the company's $31 billion in debt and how that will affect financing and business decisions going forward.

Dell for its part has been impressive, managing to maintain a firm footing while realigning its business objectives. While the company has kept its debt in check, it has not been paying dividends. This is likely to drive away a number of investors, especially those looking at the company's flat revenue growth last year. I think other people are taking notice of the same thing; Dell's investors are now holding nearly 4% of its stock float in short shares. I believe the company will have to prove that it has turned the corner before Wall Street gets excited again.

For these reasons, I still like what Cisco has to offer over its competitors. The company has raised its dividend yield (from 1.3% to 1.5%), it has a very manageable debt burden, and the stock has climbed 50% in the past six months. The company seems to be one step ahead of its competitors, something that is crucial for success in the tech industry. I believe this position will serve Cisco well in the months to come.

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