Time To Buy Cisco

| About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO) is an appealing asset in the tech industry that is undervalued, but has substantial potential for capital appreciation and an increasing dividend. Despite macroeconomic headwinds worldwide, Cisco was able to increase earnings faster than revenue while lowering expenses and undertaking key partnerships. Cisco recently announced several products and services that will improve healthcare, enterprise operations and public sector organizations as well. Current shareholders should hold long term, while interested investors should buy as the market will begin to reflect and coincide with the organic growth and improving future outlook that Cisco is experiencing.

Cisco's competition in the enterprise sector for cloud SaaS and applications is Oracle (NYSE:ORCL), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT). EMC (EMC) is worth comparing as it recently joined with Cisco and VMWorld (NYSE:VMW) to compete with industry leaders like IBM and Microsoft. IBM's $206 per share is the most expensive; the other firms are currently below $35 per share. Microsoft's $261 billion market cap is the highest; IBM's $236 billion is next, Cisco's market cap is around $100 billion, and Oracle is $161 billion. Cisco's price is around 12.7 times earnings; IBM and Microsoft are over 15 times earnings, while Oracle is 16.8 times earnings and EMC is 22.8 times earnings. Cisco's 1.97 price-to-book and 2.19 price-to-sales ratios are also the lowest.

IBM's $13.75 EPS is by far the highest of these firms; Cisco's EPS is $1.49, Microsoft's is around $2.00, Oracle's is $1.96 and EMC's is $1.21. Oracle's 15.5% five-year sales growth is the highest while Cisco's is around 5.7%; this is only higher than IBM's 3.2%. IBM's sales for the past quarter year over year ran at a 3.3% deficit; Cisco's grew around 4.4% while EMC's sales grew 9.6% year over year. Cisco's current and quick ratios are both around 3.4; these are the highest among these firms. IBM's ratios are around 1.2, while Microsoft's are around 2.6. Cisco's 0.32 debt-to-equity ratio is only higher than EMC's 0.08 and Microsoft's 0.18. Cisco's 16.3% return on equity is only higher than EMC's13.6%; Microsoft is around 27%. Cisco's 21.8% operating margin and 17.4% net profit margin are both higher than IBM's by around 180 bps.

Cisco's annualized dividend is around $1.68, Oracle's is around $0.24, Microsoft's is around $0.80, and IBM's is around $3.40. Cisco's beta score is slightly above one and is the highest among the aforementioned firms. Cisco's average daily volume is around 41.8 million shares, IBM's around 3.6 million shares, and Microsoft's around 37 million shares. Cisco is 9.1% below its 52-week high, the furthest of any of the aforementioned firms. Cisco's 6.6% increase year to date through late September and 0.05% in the past month is the smallest stock growth among these firms. EMC increased 3% over the past month and 28% year to date, while Oracle increased 29.5% year to date. Cisco's stock increased around 2.2% since its last earnings release.

Cisco's recent earnings release shows strong growth in the fourth quarter and throughout 2012. Fourth-quarter net sales increased 4.4% year over year to $11.6 billion. Full fiscal year revenue totaled $46.06 billion, increasing 6.6% year over year. Cisco decreased R&D spending 4.6% year over year in the fourth quarter to $1.4 billion, and it decreased 5.8% year over year for the full year. Fourth-quarter expenses were 38.9% of revenue, decreasing 160 bps year over year. Full0year expenses decreased 270 bps to 37.9% of total revenue.

Fourth-quarter operating income was 20.3% of revenue, increasing 730 bps year over year; operating income increased 410 bps in the full year to 21.9% of total revenue for the fiscal year. Fourth-quarter net income was $1.91 billion, increasing 55.6% year over year; full-year net income was $8.4 billion, increasing 23.9% year over year. Fourth-quarter net income increased 540 bps to account for 16.4% of total revenue, and full-year net income increased 250 bps to account for 17.5% of total revenue. Products accounted for 79% of net sales, while services accounted for around 21% of net sales in the fourth quarter and for the full year.

Much of the revenue and earnings growth was due to lower restructuring charges, higher prices realized in the U.S., and sales growth in Japan. Cisco expects headwinds in Europe to continue, but also saw solid growth in emerging markets like Mexico, Brazil, China, and Russia. Cisco will align more of its resources in the future to capitalize on these markets. The majority of the revenue growth came from service providers as well as commercial and enterprise markets. Revenue growth from the public sector was relatively flat, and Cisco projects lower U.S. federal spending to continue throughout 2013.

Cisco realigned, restructured, and streamlined operations effectively to focus on core functions of routing, switching, and security mobility solutions as well as collaboration, data center virtualizations and clouds, video, and architectures for business transformations. Cisco recently formed a strategic partnership with EMC and VMWorld to strengthen its portfolio of cloud computing products and services. Cisco recently released Secure X, a platform to help enterprises securely transition into a cloud infrastructure. Combining EMC cloud products and Cisco's services should make it a viable choice to consider with leaders IBM and Microsoft.

The cloud market is expected to approach $270 billion annually by 2020. With an abundance of security and networking cloud service, Cisco is in an ideal position to grow in this new era; the largest enterprise or development projects require Cisco products or services. Cisco recently released lowest latency networking technology that is 60% faster than competitors, ideal for high-performance trading and computing along with big data projects. Cisco also launched its IP Video Surveillance Manager 7.0 that makes it easier and quicker to deploy up to 10,000 cameras for security, or up to 100,000 when combined with Cisco's PSOM platform.

Cisco has a number of services and products to help enterprises increase data security and transparency. Cisco's products will become more widely used and standard operating procedure as more organizations transition to clouds. The United Nations recently reached an agreement with Cisco to utilize its networks and IT in times of national emergencies or natural disasters. Cisco also provided IT for improving smart grid solutions, and it worked with 3M to enable physicians to assess heart and lung problems from remote locations with the Littmann electronic stethoscope. These are just a few of the catalysts that will enable Cisco's growth to outpace its competition in the medium to long term.

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.

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