Cisco Systems (CSCO) has been on the frontier of the networking and communications industry since its incorporation in December 1984. Cisco designs, manufactures, and sells Internet Protocol-based networking and provides the services related to its use. Cisco's products are classified into four categories: core technology, routing and switching, new products, and other products. The company's products and services are globally known to improve productivity, reduce costs, and sustain a long-term competitive edge. Cisco's customers include public and private businesses, service providers, commercial enterprises, and consumers.
Business Prospects
Aside from developing and manufacturing technologies and products internally, Cisco acquires, invests, and forms alliances with companies that deliver services complementary to Cisco's existing products and services offering.
Cisco recently announced its intent to acquire Truviso, a company providing accessible, real-time network data analysis, and reporting software. This will enable Cisco to provide instant access and visibility over networks to increase operational efficiency and boost revenue. On March 15, 2012, Cisco expressed its intent to acquire NDS Group, a leading provider of video software and content security solutions that enable users to access digital content on the go. This acquisition will streamline Cisco's Videoscape platform and expand company opportunities in China and India. Cisco will collaborate with NBC Olympics, a division of the NBC Sports Group, in covering 17 consecutive days of the London Olympic Games from July 27 to Aug. 12, 2012. This is the third team-up of Cisco and NBC Olympics for this event.
On May 1, 2012, Cisco acquired privately held ClearAccess, a supplier of TR-069-based software to service providers for the provisioning and administration of residential and mobile devices. On March 19, 2012, Cisco announced the acquisition of privately held Lightwire, a developer of advanced interconnect technology for high-speed networking applications.
Stock Valuation Metrics
Cisco is a highly diversified company, with six acquisitions in 2011 and four acquisitions in the past two quarters of 2012. It is a leading technology stock that is well-positioned in the global market and responds strategically to market challenges. The common stock has a market cap of $89.6 billion as of June 28, 2012.
As of June 19, 2012, Cisco's price-to-earnings ratio is 12.4, lower than the industry average of 17.6. This can be attributed to Cisco's efforts to capitalize on new acquisitions, initiatives, and infrastructure over the past year. This short-term decline due to capital expenditure is expected to benefit the company in the long term. Cisco reported an increase in earnings by 8%, which will continue to rise with the company's cost reduction effort that is expected to save $1 billion in fiscal operating expenses annually. Meanwhile, the stock price peaked in April and declined in May. The decline can be attributed to the acquisitions completed in the same month. In June, Cisco's stock price traded at a consistently higher price than it did in May.
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Cisco's stock beta is 1.23, compared to the industry average of 1.13. Cisco is relatively fluctuating, but it yields consistent and high returns. The price-to-sales ratio is 2.02 higher than the industry average of 1.38, whereas price to book ratio is 1.80, which is also higher than the industry average of 1.17. Cisco paid dividends twice in January and April this year as part of the quarterly cash dividend initiative. Return on equity is at 14.9%, below the industry average of 10.1%.
Financial Ratios
Cisco's quick ratio is 3.49 compared to the industry average of 1.83; the current ratio is 3.57 compared to the industry average of 2.15, and the debt-to-equity ratio is 0.3 compared to 2.4 industry average. The company has a strong asset group due to acquisitions, which makes it highly liquid and solvent. It also has long-term debt used to finance steady growth of the company. Gross margin during the last 12 months is 61.8% compared to the 31.71% industry average, while net profit margin is 18.6% compared to the 7.3% industry average.
Looking at its price chart, Cisco seems to have finished its correction. I have written an article regarding Cisco's price share issues while it was trading at very high levels at the beginning of April, recommending investors to wait for a correction. Surprisingly, Cisco started skydiving at the time my article was published. With a Relative Strength Index of 39.26% and a target price of $21.68, things are quite suitable for Cisco to skyrocket again. Moreover, this atmosphere is supported by its cheap forward P/E ratio of 8.7.
Cisco's robust financial position is due to the growing and consistent demand for IT solutions and technologies in virtually all public and private enterprises, universities and even home businesses. Cisco's wide distribution base and strategic partnerships with other tech leaders in the market contribute to a fiercely competitive company. Based on its indicators, Cisco has a C Grade O-Metrix score of 5.58.
(For more information on O-Metrix calculations, please click here.)
Competitor Analysis
Cisco's business platform is extremely competitive and rapidly changing. The company's vast products and services are facing competition with numerous sellers globally, and the overall number of competitors is increasing. The networking, IT solutions, and communications market has low barriers for entry and new opportunities for product creation are consistently on hand. Competition is also present in the research, development, manufacturing, supply, distribution, and sales aspects of Cisco's industry.
Cisco has a quarterly revenue growth year over year of 0.07% compared to its direct competitors Alcatel-Lucent (ALU), Hewlett-Packard (HPQ), and Juniper Networks (JNPR), which have growth rates of -0.12%, -0.03%, and -0.06%, respectively. In the last 12 months, Cisco maintained positive earnings per share at 1.36 compared to Alcatel's 0.71 and Juniper's 0.58. Cisco ranks fourth in computer hardware sales in the United States. It ranks first in market capitalization within the industry, as well as in annual dividend yield out of 26 industry competitors.
Summary
Cisco is a strong technology stock as it is a solid and booming networking and communications company. It is continually transforming its operations to avail of the economies of strategic alliances, acquisitions and partnerships. It is a focused, innovative, and trusted leader in building IT investments that develop into valuable assets of a business. Cisco consistently produced solid figures and business fundamentals year after year, which keeps this global company a worthy investment as we venture into the future of information technology and communications. Cisco mostly recovered after taking some wrong steps, and it can offer satisfactory returns in time supported by its increasing dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
