Cisco Systems, Inc. (CSCO): An Undervalued and Underestimated Tech Giant

The fair value ranges for each of these scenarios are shown in the table below. In each case, the net cash of $5.60 per share has been added to the value of the future cash flows.

Scenario Low-end High-end
No-growth $18.33 $21.52
Slow-growth $21.99 $27.46
Realistic-growth $25.39 $32.49

Cisco is currently valued as if the company will never grow again. This seems overly pessimistic. Cisco traded below $16 a share at one point last year, which is clearly an absurd price given the calculation above. I took advantage of that absurd price when I bought my shares last year, but even today the stock offers value. The realistic-growth scenario suggests a fair value between 20% and 54% higher than the current share price. Even after a run-up of about 30% from its low in the middle of last year, Cisco is still undervalued.

The competition

The fact that Cisco has been able to keep gross margins above 60% over the past decade should tell you something about Cisco’s economic moat. Juniper Networks, Inc. (NYSE:JNPR), a much smaller rival, trades at a significantly loftier valuation than Cisco. Revenue for Juniper actually decreased in 2012 along with free cash flow. A P/FCF ratio of nearly 50 makes the stock seem a bit outrageous.

Hewlett-Packard Company (NYSE:HPQ) is a big competitor in the enterprise switch market, but the company has faced declining revenues and profits over the past few years. HP is a company which tries to do too many things and does most of them poorly, and it may be years before the company can stabilize its cash flows.

Alcatel Lucent SA (ADR) (NYSE:ALU) has been troubled for years, with negative free cash flow every year since 2006. It seems that Cisco is the only company in this space which hasn’t suffered declining revenues, decline profits, or both like most of its competitors.

Here’s an idea of how dominant Cisco is in its core markets. This image is from 2010, but it still should be reasonably accurate.

Do you see all of those colored lines below 20% in the Switching graph? Those are Cisco’s competitors, including the three listed above. Cisco is absolutely dominant in its core markets. Here’s a more recent snapshot of market share.

Source

The Bottom Line

Cisco is a market leader which is priced like a no-growth has-been. Even after a run-up in share price Cisco is still significantly undervalued. With $5.60 in per-share cash and about $2 in per-share free cash flow a stock price of $21 seems almost too good to be true. And with a rapidly increasing dividend and the potential to boost per-share earnings with stock buybacks, Cisco is poised to provide exceptional returns for investors.

The article An Undervalued and Underestimated Tech Giant originally appeared on Fool.com and is written by Timothy Green.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!