Cisco's quarterly results are coming soon and, given what happened during the last couple of years, some volatility is expected.
If you were fortunate enough to only start investing in Cisco (CSCO) in the summer of 2011, you are enjoying a pretty good return, but the vast majority of investors almost certainly invested earlier. In this case, the return is disappointing and probably most investors are break-even our negative on their investment.
Since 2007, the market cap of Cisco floated between $176,716 million in the end of 2007, to $86,796 million in the end of 2011, having dipped below $80 billion during last summer. At $19,2 the company is currently valued at $103 billion so what's next?
| 2011 | 2010 | 2009 | 2008 | |
| Cash and Short-term investments millions | $44,585 | $39,861 | $35,001 | $26,235 |
| Total Assets millions | $87,095 | $81,130 | $68,128 | $58,734 |
| Long Term Debt millions | $16,234 | $12,188 | $10,295 | $6893 |
| Total Equity millions | $47,226 | $44,267 | $38,647 | $34,353 |
| Shares outstanding millions | 5,435 | 5,655 | 5,785 | 5,893 |
The Balance Sheet looks pretty good, with almost half of total assets in cash and a relatively small amount of long-term debt. We can also see that during that time the company managed to create value to shareholders, increasing total equity by $13 billion and also rewarding them with a stock-buyback that decreased the number of shares by 450 million.
Until here everything looks fine, so it all comes down to what is the price you are willing to pay to own the company?
It´s also important to consider that even with the leading position that Cisco has, the company is still in the technology sector, where in a short period of time some other new company with a new technology can do a lot of damage.
But let's look at the income statement:
| 2011 | 2010 | 2009 | 2008 | |
| Revenue millions | $43,128 | $40,040 | $36,117 | $39,540 |
| Operating Income millions | $7,674 | $9,164 | $7,322 | $9,442 |
| Net Income millions | $6,490 | $7,767 | $6,134 | $8,052 |
The company has managed to increase revenue in the last 4 years but that increase has failed to increase earnings. Even so, since the beginning of last year that the margins seem to be improving, a sign that better results can be on the horizon and that the company focus on getting profits to rise faster than revenue isn't just words.
At current market prices, the investor will be paying more or less 15 times annual earnings which translates in a return of 6,3% (6.490/103). It seems a good return for a company as solid as Cisco and on a per share basis, it might continue to increase through better earnings and the stock buyback program.
So at $19 it seems like a good valuation to start investing in this company. Of course that on the quarterly earnings announcement day the stock can move significantly, so you have to decide if you want to gamble going into the 9th of May or start investing before. If you already hold Cisco, I think that selling at this price should be out of question.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
