Company Overview: Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (NYSE:IP)-based networking and other products to the communications and IT industry worldwide. The company offers routers that interconnect public and private IP networks for mobile, data, voice, and video applications; switching systems, which provide connectivity to end users, workstations, IP phones, access points, and servers; application networking services; home networking products, such as voice and data modems, routers and gateways, Internet video cameras, home entertainment storage, wireless home audio, and home network management software; and network and content security, email, and Web security products. It also provides storage area networking products that deliver connectivity between servers and storage systems; unified communication products to integrate voice, video, data, and mobile applications on fixed and mobile networks; video systems, including digital set-top boxes and digital media products; and wireless systems.
Prognosis: The stock has dropped nearly 10% today after last night’s earnings report which provided tepid forward guidance and missed on the revenue side. The stock price is about even from where it was a year ago despite significantly increased earnings and revenues over that time period.
Valuation: CSCO is selling for approximately 12 times this year’s consensus earnings and less than 11 times next year’s projected earnings. It has over $4.75/share in net cash on its balance sheet. It is selling near the low end of its five year range for P/E, P/S, and P/CF.
Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term after the disappointment of its current earnings release fades:
1. The continued growth of the internet, teleconferencing, wireless, etc…should ensure strong growth; especially outside of the U.S.
2. Company throws off impressive cash flow and has a large amount of cash on its balance sheet. This gives the company flexibility to buy back stock, continue to invest heavily in R&D and/or acquire new growth assets or technologies
3. Large established customer base provides geographic diversity and gives them continuous upgrade revenue opportunities
4. Investments in Telepresence, Physical Security, digital media and other emerging technologies should ensure continued new growth channels
Recommendation(s): Given its low valuation, fortress balance sheet, solid revenue growth and strong cash flow; we feel stock is currently undervalued. In our opinion, the stock should be trading at a more reasonable rate of approximately 12-14 times our estimate for this year’s earnings of around $1.75 after stripping out the $4.75/share of net cash on its books. Our one year Target Price is $26-$30, up from the current price of $21.37.
Disclosure: Long CSCO