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Running The Numbers - Cisco ($CSCO) near a 52-week high but justified

|Includes:Cisco Systems, Inc. (CSCO), HPQ, IBM, IN, JNPR, LXK, MSFT, NZ

Cisco ($CSCO) are featured in Barron’s looking at how their revenues could hit the US$100 billion level (2009 revenues US$36.1 billion).  With the $CSCO share price over US$25 - 52-week range US$16.30-26.85 - we decided to have a quick look.

Valuecruncher Interactive Analysts Report For Cisco ($CSCO)

We have the comparator group set as Hewlett-Packard ($HPQ), Lexmark ($LXK), Intermec ($IN) and Netezza ($NZ). You can change these peer companies on the site. For example you could add:

  1. Microsoft ($MSFT) - Interactive Analyst Report For $MSFT
  2. IBM ($IBM) - Interactive Analyst Report For $IBM
  3. Hewlett-Packard ($HPQ) - Interactive Analyst Report For $HPQ
  4. Juniper Networks ($JNPR) - Interactive Analyst Report For $JNPR

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$27.71 for $CSCO - 6.5% above the current share price. We see $CSCO slightly undervalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $MSFT, $IBM, $HPQ and $JNPR as noted above.  I am going to look at only one of the metrics we use at Valuecruncher - EV/EBITDA. Enterprise Value (NYSE:EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $CSCO is trading at 13.6x ($CSCO is being valued at 13.6x last year’s profit at the EBITDA line). A dollar of $CSCO EBITDA is worth more a dollar of $MSFT, $IBM or $HPQ EBITDA. $CSCO’s EV/EBITDA is less than $JNPR’s but that relates to greater growth expectations and a poor 2009 financial year for $JNPR.  $CSCO makes more margin at the EBITDA line than any of these comparators except $MSFT. The comparators look about right.

csco-blog-post-20100404

Summary

Based on our DCF valuation - $CSCO looks slightly undervalued. Looking at some comparators - the market is valuing $CSCO in-line with expectations - compared to the peer group. $CSCO is trading close to 52-week highs - but this looks justified.

Disclosure: no positions.



Disclosure: No Positions
Stocks: CSCO, HPQ, IBM, IN, JNPR, LXK, MSFT, NZ