If the cash holdings of Cisco Systems, Inc. (NASDAQ:CSCO) are deducted from the market capitalization, this business is trading at a ridiculous level of 6.94 times 2013 consensus earnings and the shares are nothing short of a screaming buy at this level. One of my valuation metrics for this type of business is the projected earnings growth rate plus the dividend yield times the next year’s consensus earnings. When applied to Cisco Systems, Inc. (NASDAQ:CSCO), this calculation produces a current fair value of $25.15 a share with an anticipated appreciation of 13% per year for the next five years.
Speaking the language of business
If you are looking to own a business that produces products that are almost inextricably imbedded into the lives of almost every business person in the world, you need look no further than Microsoft Corporation (NASDAQ:MSFT). Microsoft Office is the gold standard of business software. Since it is used by almost every business in the U.S., it must be used by just about any business that wants to communicate with others in a seamless fashion. Best of all, Microsoft can update software every few years with a few new features and cause everyone to eventually have to upgrade while use of the new features becomes common among users. Of course, it also makes the dominant Windows Operating System.
While some growth is coming from its move into the tablet market, the real value of Microsoft Corporation (NASDAQ:MSFT) is in its franchise software offerings, its ability to raise prices and its massive cash hoard. With approximately $8.92 a share in cash and short-term investments currently sitting on its balance sheet, Microsoft Corporation (NASDAQ:MSFT) is well-positioned to continue returning value to existing shareholders as it has been doing for the past five years through $63.6 billion of share buybacks and dividends. If the existing cash is subtracted from the share price, the stock is trading at only 8.95 times the current year’s projected earnings. Considering the dominant position its products hold in our everyday lives, the value should be twice what it is. Based upon the same metric I applied to Cisco shares, current fair value of Microsoft is $33.52 (about where it sits today) with an anticipated forward appreciation of 12% per year.
Final thoughts
Apple is making the transition from a growth business to a value play and seems to be taking the appropriate actions for successful change and, like Cisco, shares are cheap. Microsoft Corporation (NASDAQ:MSFT) appears to be fairly valued right now but should provide 12% annualized gains for years to come between dividends and share price growth.
The article Is Big Tech Still Really Cheap? originally appeared on Fool.com and is written by Ken McGaha.
