In this installment of Using a Value Line Report, we will be taking a closer look at the San Jose-based broadband networking giant, Cisco Systems (CSCO – Free Cisco Stock Report). For more than 30 years this company has established a reputation as not only an industry pioneer by becoming the world’s largest manufacturer of computer networking equipment, but it has also emerged as one of the most successful companies to arise from Silicon Valley’s golden age. The company has developed a brand of quality that has become synonymous with the cutting edge of network engineering technology. That credibility has helped Cisco operations to ascend to the upper echelon of technology’s elite and earned it a coveted seat at the table among the Dow components. In this review, we will analyze the stock’s investment merits, as well as some potential red flags that are worthy of note.
First, we will identify the ratios and fundamentals that support Cisco’s value appeal. Hence, a glance at the Price-to-Earnings Ratio at the top of the page in the Top Label,which is listed as 11.6x projected 12-month earnings per share, is well below the company’s historical average. Normally, this would be a major sign that the stock is undervalued. However, some may argue that the lower P/E reflects the company’s slower earnings growth expectations over the coming years. Shifting over to the Annual Rates box, it is evident that Cisco’s growth rates for sales, cash flow, and earnings have slowed over the past 10 years. Moreover, our projected growth rates over the next 3 to 5 years are even lower still.
From a stock price performance perspective, after ascending to a multiyear high of $30.31 in early March, the equity has been under pressure over the past six months. Uneven earnings comparisons over the past couple of quarters are likely to blame for souring investor sentiment. A glance at the high/low price ranges (just above the Graph) reveals that the stock slipped to a calendar-year trough in August. Still, shifting one’s attention to the Financial Ratings box on the bottom left of the page, it would appear that the equity’s marks for Price Growth Persistence and Stock Price Stability (55 out of 100 and 30 out of 100, respectively), compared to the score for Earnings Predictability (85 out of 100) allude to a slightly different conclusion. Conceivably, investors may be unwilling to commit to higher premiums for these shares given the likely limited potential for an upside catalyst that would support a higher multiple at this juncture. In fact, the Graph line displays the stock’s seemingly lateral overall trajectory for more than a decade.
Additionally, the long-term horizon is not particularly compelling either, despite respectable revenue and earnings growth projections out to late decade. A look at the Statistical Array and Quarterly Earnings box demonstrates the company’s year-to-year earnings advances. Moreover, after years of corporate cost cutting and shoring up liquidity, the global economic recovery has begun to gain traction. Hence, the gradual unlocking of pent-up demand as corporations incrementally open up cash coffers to invest in technology infrastructure, rather than costly physical expansion, should continue to drive the company’s top and bottom lines. Furthermore, the company’s proactive efforts to shift its business model towards higher-margined growth-driven products and services ought to further aid profit growth. Indeed, the Commentary section of the Value Line report on Cisco supports this notion, as analyst Kevin Downing states that “We are cautiously optimistic that growth will improve as video sharing, cloud computing, and the Internet of Things momentum continues to drive network upgrades” With this in mind, it would seem intuitive that this market-leading technology outfit ought to be a solid choice for the value-oriented investor seeking a standout, blue-chip dividend growth play.
That said, we believe the proverbial cherry on top here is the attractive Dividend Yield, which at 3.2%, is quite generous for a tech stock. Indeed, the company has considerably ramped up its dividend payouts since the initiation in 2011. Moreover, the Financial Estimates area of the Value Line page indicates that we expect Cisco to continue to increase its distributions over the next 3 to 5 years, albeit at a lesser rate than in recent years.
All told, we believe that at the current quotation, Cisco offers a decent entry point for what may well prove to be a long-term equity turnaround story that has yet to fully unfold. Indeed, our sales and earnings growth projections could be somewhat conservative, should the global economic recovery accelerate faster than we anticipate. In any event, while the stock may never hit levels achieved before the tech bubble burst, the income component, coupled with the company’s considerable cash hoard and financial flexibility, suggest the potential for lucrative investments in the future is quite plausible. Thus, at the current valuation, CSCO is a solid value choice for any well-balanced portfolio.