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Cisco Systems (CSCO) is the bulwark in the networking arena. I mention and rank four major competitors below. Like so many big companies, Cisco is already starting to slow its earnings growth. Second and third-tier companies will most often outperform the older giants. Surprise, the risk / reward ratio is also often superior. As a shareholder, it must be disappointing or live with the poor performance of Cisco's price per share.

Cisco talks much about its three-year plan and its successes. In reality, for several years the 'talk' does net measure up. I share my assessment of Cisco in order to help investor expectations conform to reality. In my practice, a reality check is quite similar to my process of comparative analytics. Nowadays, companies either have or do not have clear valuation support for future price appreciation. Cisco is not measuring up to reasonable corporate expectations.

Despite the recent acquisitions and positives, Cisco does have its problems. The most alarming concerns are the inability to accelerate its share price. You might ask me, just how is this accomplished? My answer is simple and should be obvious to all investors. In less than one hours time you can gain a perspective of why the leaders in all industries are or are not successful. Do some valuations of the leaders and then compare the numbers with companies like Cisco? Lastly, Cisco's problems are well described in the chart below. What the charts don't share is that the root problem is always management. And, what investors don't understand is that few companies have good management.

Earnings for the past two quarters have been very positive. Revenue for the third-quarter was about $11.6 billion, up to 7% year over the year. Revenue is split between products at $9.1 billion and services at about $2.5 billion. This sounds good, but in the past six months the price per share has dropped by over 10%.

Cisco is currently selling for about $16. and has a recent high of $21. It pays a 1.95% dividend which is not all that generous for a large company. It is not likely that investors will be rewarded with much upside price appreciation in the coming months. The recent price decline from the mid-March highs convinces me that lower prices are yet to come.

Price History

Did you know that Cisco's shares sold for over $77 in late 2000? The highest it has been since was in 2007 when it reached $32 per share. That is twice its current price after the 2009 to date rally. The 20-year chart (see below) tells this story best. You may want to ponder before taking new positions. This chart compares Cisco with the SPDR S&P 500 ETF (NYSEARCA:SPY). I use this ETF to provide an important perspective about a company that I am valuating. The first is thing how Cisco tracks the index in bullish and bearish market time frames. The second thing is a statistical measure of percentage gain and loss during bullish and bearish market time frames. Trends are a very helpful tool when investing wisely.

Current Valuation of Cisco Systems (NASDAQ:CSCO)

Current Price:

$16.40

Target Price: (from the high)

plus 6% / minus 20+%

Trailing P/E

12.1

Forward P/E (fye 12/31/13)

8.5

PEG Ratio

1.21 - good

Price to Sales:

1.93 - ok

Price to Book:

1.72 - ok

Valuation Divergence:

(minus) - 29%

Source: Raw data taken from Finviz.

Notes for the above table: Target price is calculated and produces a probable range of the current price over the coming one to three months. Valuation divergence is calculated and produces a plus or minus percent of price over the following one to three months after a given bullish or bearish inflection point.

These are not strong Valuations and Target Price Projections. When I do further fundamental studies, the valuation does not improve. Projected earnings growth for Cisco will fall off for a couple years or more. Good technical and consensus opinion analysis suggests that Cisco will continue to be a longer-term good but not likely excellent performer. Investing in Cisco at this time, or even holding, definitely is not investing wisely.

Click to enlarge.

Regarding the above chart, please note the following: The earnings per share remains well below the 2007 level. The P/E ratio is flat-to-down, which is a positive. The volume is diminishing over the years. These are not supportive facts to foster holding Cisco in your portfolio.

Financial Statements

I have reviewed the company's income statement and balance sheet. I do not find anything to take issue with. There are many other companies with financials that present a better outlook.

Market Status

I use several indices in my focus to identify the on-going bullish and bearish inflection points. The NYSE and Nasdaq Composite Indexes are represented very well by the NYSE ETF (NYSEARCA:NYC) and the Nasdaq ETF (NASDAQ:QQQ). Identification of bullish and bearish inflection points is important. So, I also emphasize and use market breadth indices. Breadth does not have a tracking ETF; therefore, I have created my own excel charts.

I suggest that you take a long look at this 20-year chart. Having a longer-term perspective of a possible future investment will always give you a more consistent bottom line. Comparing the SPDR, S&P 500 ETF (SPY) tells a very compelling story about CSCO.

Further support for my guidance for the general market can be read in my Instablog article on "Wednesday - General Market Update & Commentary."

Technical Opinion

It is clear from the above price charts that there are some longer-term problems with Cisco. Technical indicators are in the process of breaking down. This is my initial warning that prices will be falling in the coming weeks and perhaps beyond.

Rating of Four Industry Peers

Company Symbol

Rating: (ascending / status quo / descending)

(NYSE:JNPR)

Poor -- descending

(NASDAQ:RVBD)

Poor - - descending

(NASDAQ:ARUN)

Poor -- descending

(NASDAQ:FNSR)

Poor -- descending

My Ratings range from Excellent to Very Poor.

Summary

The above tables and charts present a clear and not-so-positive account of this Dow 30 company. Cisco's "reality check," like so many other companies, is not all at all positive. I recommend taking a few minutes to study my 20-year chart. When buying or selling, taking a longer-term view of a security's price history is very important. This is a warning about buying or holding Cisco.

Conclusion

I am bearish on both the world economies and the general market. My more recent Instablog postings are focused on securities that should not be currently held in your portfolio. It is important for you to understand that holding cash during questionable time frames is a wise choice. (This is definitely a "questionable" time frame).

Further and on-going support for these companies will begin this coming Saturday. My "Saturday Update" can be read weekly in my Instablog article.

Have fun, investing wisely.

Source: Cisco Valuation Suggests A Reality Check With A Warning