Cisco: Grossly Undervalued At Current Prices

| About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO) has an established, proven and reputed business in designing, manufacturing and selling internet protocol based networking. With the shrinking world and its need to remain connected, it is poised to rake in enormous profits for itself and its investors in the near future. Its data-based communication linkage for all types of media makes it an instant winner, especially since it is a pioneer in the field. The company currently offers routing and switching, advanced technologies and other products like optical and cable networking.

As far as the company's financials are concerned, it has been showing consistent profitability over the years, including the period of global recession. With a market capitalisation of close to $100 billion and lean employee strength of only about 66,000, the company is bound to show higher profitability in the days to come as the world economy improves. Currently, it has a trailing twelve month EPS of $1.49 and relatively low P/E ratio within the industry of about 12.11 against an industry average of 19.41. This amply illustrates the company's potential returns for its investors as and when the valuations are realised. The company has also shown an annual dividend yield of about 3.1%. It has also given a positive earnings growth in the past 3 years which is a definite positive for its growth in the future.

Cisco had also announced its intention to acquire a privately held company called Truviso, which provides networking analysis and hence would have definitely added to its business value. Although the specific financial terms are still not known, the acquisition may have been totally accomplished in the last quarter of 2012. Earlier in the year, it had also acquired ClearAccess which provides software for provisioning and management of last mile connectivity, both of which are residential and mobile devices. These acquisitions are in line with the company's core business competence and will enable it to provide one-stop solutions. This in turn will strengthen the network management resulting in generation of higher realizations for its bottom line.

Earlier this year, the company provided a live coverage of the summer Olympics in collaboration with NBC Olympics, a division of the NBC Sports Group, and delivered 17 consecutive days of live action from July 27th to August 12th, 2012 through its Internet Protocol (NYSE:IP) video contribution network as well as data intensive applications. As the economic activities re-start post the recession, it is likely that more and more money will be channeled into such mega-events. The demonstration of technology to deliver thousands of hours of video coverage to multiple screens through all-IP network is unmatched and is a hidden asset to the company's balance sheet. Therefore, Cisco is going to be in the forefront of all event managers and is likely to rake in huge earnings for itself and its shareholders.

There is only one downside for the company and that is none of the Wall Street analysts expect the company to grow as rapidly as it did in the mid 90's during the dot-com boom, when its common shares were trading at $80 (market cap at that price was $580 billion) and had almost 60% growth rate. The company also has major competitors like Alcatel-Lucent (ALU), Ericsson (NASDAQ:ERIC), Juniper Networks (NYSE:JNPR), Riverbed Technology (NASDAQ:RVBD) to deal with for its profitability. This is despite the fact that the company has been showing consistent growth and has been beating the street estimates consecutively. The company has also been providing a continuous positive outlook for its future business. This under-rating may well turn out to be a boon for long-term investors to place their bets since the stock is grossly undervalued at present market prices.

Riverbed Technology has significant presence in wide area networks through its innovative and comprehensive software solutions. Though the company has provided an excellent return on equity of about 9% apart from declaration of its excellent Q3 numbers, I will not advice investors to pick this stock. To start with, the stock is having a very high beta of about 2.26 which may suit traders more, especially since the market cap is relatively small at only about $3 billion. Further, the valuations at current levels are too rich for getting any long-term benefits. The stock trades at a high P/E ratio of 54.9 against an industry average of much lesser and a trailing EPS of only $0.42, making it a suspect in the coming years.

Alcatel-Lucent on the other hand has an excellent price earnings ratio of only 1.63 making it very attractively proposition. However, the company has displayed a marginally negative quarterly growth along with an extremely low profit margin of 0.03%. The company is currently on a cost cutting spree to become more competitive. Till some more clarity emerges with respect to the company's competitive edge, I will rather advice the investors to wait a while before investing in this counter.

Ericsson is also having a relatively low valuation of about 12.98 and a low beta of 1.11, making it one of the highly stable stocks in this sector. However, the company's core business of telecommunication equipment, especially mobile devices, is likely to be under considerable threat in the coming years. The Chinese (likes of Huawei Technology, Xiaomi, HTC and ZTE), Samsung of Korea and the Indian companies (likes of Micromax and Karbon) are flooding the markets with cheap and "feature-rich" devices resulting in drastic reduction in profit margins for all competitors. This has made the company to cut prices and reduce profit margins. Hence, I would advise people to avoid the stock even though the current valuations look attractive since the earnings of the company is surely going reduce going forward. Therefore, investors will not get the kind of returns that they would otherwise have received.

Juniper Networks is also coming up with its 3rd quarter numbers, which are expected to be good, along with a strong guidance for the last quarter. However, the company is expected to face stiff competition in its core business in the near future. Currently, the valuations of the company at a price multiple of 37.14 do not give the confidence to buy for investors. The stock has also displayed high volatility and is maintaining a beta above 2. However, it may hold interest for traders as rumors are ripe that the company has sought for its sale to EMC Corporation through JP Morgan. Hence, I will strongly recommend the stock only for traders to take covered position on either side of the trade to benefit from the strong market rumors and generate handsome returns in the short term.

Considering all the above factors, I recommend buying Cisco for its strong balance sheet, impressive earnings growth and one of the best operating margins in the industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.