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Is Cisco A Good Stock to Buy?

Cisco Systems, Inc. (NASDAQ:CSCO)’s products include switching solutions (used in local-area networks and wide-are networks), routers, and set-top boxes. The company filed its annual report earlier this month for the fiscal year ending July 2012. Revenue grew by 7%, and has grown at a 4% CAGR over the last four fiscal years. Net income was also up, even after accounting for restructuring charges that Cisco incurred during the last fiscal year. Earnings were actually about even with four years ago as the company’s margins have declined over that time, but Cisco repurchased shares fairly consistently and so EPS are actually up to $1.49 from $1.31 in the fiscal year ending in July 2008. The company had about $6 billion remaining in its current repurchasing program (which was initiated in 2001) so we expect some buybacks to continue. Like many other technology companies, Cisco has a surplus of cash with $49 billion in cash, cash equivalents, and investments on its balance sheet at the end of the year versus only $16 billion in debt.

Cisco Systems, Inc. trades at 13 times trailing earnings, and with the company growing as it is (and likely seeing more repurchases in the future) and paying a dividend yield of 3% at current prices, that may be a bit low. The sell-side expects EPS to rise by 5% in the current fiscal year over the last year, yielding a current-year P/E of 10. That sounds doable to us: a small increase in the bottom line, joined with a reasonable amount of buybacks compared to the last several years. The EV/EBITDA multiple, which accounts for the fact that an investor is buying a piece of Cisco’s cash haul in addition to part of its ongoing operations, is 5.2x.


First Eagle Investment Management increased its stake in Cisco Systems, Inc. by 11% during the second quarter, leading it to own 46 million shares at the end of June (see more stock picks from Jean Marie Eveillard and First Eagle). Billionaire Ken Fisher’s Fisher Asset Management also added shares, building what had been a relatively small position in the stock up to a total of 21 million shares (find more of Ken Fisher’s favorite stocks). Edinburgh Partners, managed by Sandy Nairn, reduced the size of its position but Cisco was still one of the fund’s top five holdings at 14 million shares (research more of Edinburgh’s top stocks).

We think that Cisco’s best peers in terms of product offerings are Alcatel Lucent SA (NYSE:ALU), Hewlett-Packard Company (NYSE:HPQ), and Juniper Networks, Inc. (NYSE:JNPR). All three of these peers, in contrast to Cisco, saw their revenues decline in their most recent quarter versus the same period in 2011. Hewlett-Packard, which is somewhat weighed down by its PC business, has seen its stock price drop 28% over the last year. It looks cheap at only 4 times forward earnings estimates, but quite a bit of due diligence would be needed in order to be confident in a turnaround. The other two competitors trade at forward P/Es of 14 and 15, respectively, after also seeing declines in their stock prices over the last year. We don’t think they deserve a valuation premium over Cisco, making the larger company a better buy than Alcatel Lucent and Juniper.

Given Cisco’s status as a megacap technology company we would compare it to International Business Machines Corp. (NYSE:IBM) as well. IBM’s business was about stagnant in the second quarter of 2012 compared to a year ago, with a slight fall in revenue and higher margins combining to yield a 6% increase in earnings. IBM trades at a trailing P/E of 15 and a forward P/E of 12, a slight premium to Cisco. The company is more of a market leader, so we would say that the two are priced about right compared to each other.

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