Dow-30 component Cisco Systems (CSCO – Free Cisco Stock Report) is a leading provider of Internet Protocol-based networking and other products used to transport data, voice, and video across geographically dispersed networks. Cisco was founded in 1984 by Leonard Bosack and Sandy Lerner, two computer scientists from Stanford University who pioneered the LAN, or local area network. In simple terms, the network connects different computers over a multiprotocol router system. This technology was unheard of at that time and catapulted the company to the next level; it went public in 1990 with a NASDAQ listing and a $225 million market cap. By the year 2000, CSCO was the most valuable company in the world with a market cap north of $500 billion, but then the tech bubble burst.
Present day, Cisco Systems continues to forge ahead on numerous technology fronts, but a good portion of the tech boom luster has faded. For the last decade-plus, this equity has been, for the most part, range bound. At no time have the shares been below $13 a share, but there have also been a few brief forays into the $30+ area. Using the latest Issue of the Value Line report, we will determine whether a breakout may be ahead for CSCO or if the investment community should just pass. For starters, we need to take a look at the Recent Price, which is located at the top of our page in the Top Label. As of this report, the stock was trading at $29.33. Just below that figure we have the High/Low portion of our Price Chart. For 2016, the range has been a peak of $32 and a valley of $22.50. The stock has been trading in a somewhat similar band over the past four years.
Clearly, investors like CSCO due to its blue-chip status, but other options have been more appealing during this ongoing bull market. The recent price is towards the high side of the annual spread, not surprising due to the recent run-up in the Dow since Donald Trump won the U.S Presidential election. However, Mr. Trump’s positive business vibes are likely to be felt much more on the industrial side of the economy and not the tech sector. Regardless, the Trump administration has some new ideas with regard to the repatriation of cash balances stored overseas, and positive developments on this front would be a boon for Cisco. To be clear, though, nothing here is set in stone.
So, with the stock near the $30 mark we need to see if they are trading at a discount or a premium to our forward-looking earnings projections. The P/E Ratio is vital in this determination, and that figure is located just to the right of the recent price. As of this report, CSCO’s price-to-earnings ratio was 12.2 using 12-month earnings through June of next year. A glance down to our Array in the middle of the page gives us some historical perspective on that metric. The Average Annual P/E Ratio is the eighth line of the Array. The P/E has been between 10.3 and 12.3 over the last few years. Following this column until the very end, we see that our forward looking P/E for the period of 2019-2021 is pegged at 12.0. From all this we can decipher that the shares appear to be fairly valued in the current market, meaning there does not appear to be any discount here at this juncture.
So what has been holding Cisco back of late? A look to the lower left-hand column of the page brings us to the Quarterly Revenues Box. Here, we see that revenues are on pace to decline this year versus fiscal 2016’s total (years end July 31st). Each quarter-over-quarter comparison illustrates a drop for this fiscal year. In a nutshell, service providers are buying less. In the Commentary portion of the report in the very middle of the page, Value Line analyst Kevin Downing states that “billings to that customer group, which accounts for roughly one-quarter of total sales, fell 12% in the last reporting period”. Reasons for this dip are restrained spending as customers deal with a changing government and regulatory landscape.
Currency headwinds have also thrown a monkey wrench into the growth machine. In fact, for the current (January) interim, revenues are expected to decline by between 2% and 4% when compared to the prior fiscal year’s level. Declining sales are never ideal, and this is likely one of the reasons that investor enthusiasm around this stock remains muted.
As is often the case with stocks of this caliber, however, there is a reason to stay on board even when operations are not exactly booming. Here, it’s Cisco’s handsome dividend payout. Returning to the Top Label of the report, at the right-hand corner we find the Dividend Yield. The current yield on Cisco’s stock is 3.8% versus the Value Line median, which has hovered around the 2% range for the last year or so. Recall, CSCO is a tech play and it didn’t even start its income component until the latter stages of 2011. The dividend is growing rapidly and is well supported by the company’s rock-solid financials. In fiscal 2017, the distribution should pass the $1.00 per annum mark for the first time and this is clearly the equity’s primary draw at this point.
In summation, we like Cisco’s stock as an income play, but at recent price points there really is not much else here to get excited about in the near term. Thus, we’d wait for a more favorable entry point, which, based on historical levels could present itself over the next six month to a year. This Dow member is a good addition to any long-term portfolio, but there is no reason to rush in at this time.