Why International Business Machines Corp. (IBM) And Cisco Systems, Inc. (CSCO) Are Actually Twins

Financials of a transformation

You can see the Cisco is transforming by looking at the numbers. Like International Business Machines Corp. (NYSE:IBM), Cisco’s services revenues are growing. IBM grew services from 39% of sales in 2000 to 59% today. Cisco’s services business has grown from 16% of sales in 2008 to 22% today. Also, IBM’s capital spending as a percentage of net income fell throughout its transition. It’s the same story with Cisco. Cisco’s capital spending was 16% of net income in 2008. Today, it’s at its lowest level yet, around 11%. Thicker net margins and lower capital spending is what you want to see. That means IBM and Cisco are investing less money in the business while making more profit. In time, both IBM and Cisco might reach Microsoft’s astoundingly high operating margin (at 35%) and incredibly low capital spending (at 7%).

The Fool looks ahead

I believe that Cisco Systems, Inc. (NASDAQ:CSCO)’s transformation will be like IBM’s. Cisco should wind up with a more profitable business that produces more free cash flow. That should lead to more share repurchases and big dividend growth. Make sure you’re there.

The article Why IBM And Cisco Are Actually Twins originally appeared on Fool.com and is written by Shmulik Karpf.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems (NASDAQ:CSCO). The Motley Fool owns shares of International Business Machines (NYSE:IBM). and Microsoft. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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