Cisco Systems, Inc. (CSCO): A Resilient Tech Company With a Huge Cash Pile

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At one point in the late 90’s, Cisco Systems, Inc. (NASDAQ:CSCO) was the biggest company in the world by market cap. However, when the dot-com bubble burst, so did Cisco’s, and the company’s valuation dropped 85% during the course of a year.

Even today, the stock trades almost 75% below its all-time high. Having said that, the company has recently started to grow again. Indeed, the company’s most recent earnings report released last week blew through expectations and Cisco Systems, Inc. (NASDAQ:CSCO) could be showing investors that it’s back in the game.

This earnings report follows several years of Cisco’s return to growth. The company started issuing dividends to shareholders again back in 2012, which it then doubled during the year. The company also grew earnings 27% during 2012 and still has a rock solid balance sheet.

So, with returns now improving for Cisco Systems, Inc. (NASDAQ:CSCO)’s investors, could now be the time to trust the tech company again?

Financial stability

When it comes to the question of financial stability, Cisco Systems, Inc. (NASDAQ:CSCO) passes any test with flying colors. Cisco could be one of the most financially stable and robust companies in the S&P 500.

A strong cash position is the backbone of any balance sheet, and Cisco’s cash pile does not disappoint. The company has a net cash position of $32.3 billion, which equates to about $8.70 a share; or in other terms, around 40% of Cisco Systems, Inc. (NASDAQ:CSCO)’s current stock price. This cash position accounts for 84% of the company’s assets and 63% of total shareholder equity.

Having said that, Cisco Systems, Inc. (NASDAQ:CSCO)’s debt has grown 60% during the past four years, which is surprising considering the company’s strong cash position. However, after digging a bit deeper, it appears that Cisco has been using the current low interest rates to borrow money in order to return cash to shareholders, without denting its huge cash position.

This strategy is working well for the company, as during 2012 Cisco only paid $595 million in interest on its debt – an average interest rate of 3.6%. These interest payments were easily covered 17 times by the company’s pre-tax income, leaving plenty of room for further borrowing or even a fall in income.

Moreover, Cisco Systems, Inc. (NASDAQ:CSCO) has current ratio of 3.5 times, indicating that the company is able to cover its current liabilities with current assets three-and-a-half times.

Staying ahead of the game

Cisco Systems, Inc.With its huge cash pile effectively being used as collateral to increase borrowing, Cisco is keeping its pile of cash ready for acquisitions. As a technology company, Cisco Systems, Inc. (NASDAQ:CSCO) operates in a very competitive environment with a constantly changing landscape. However, Cisco’s huge cash pile allows the company to swoop in on competitors, acquiring them without having to ask the market for extra cash – allowing Cisco to stay ahead of the game.

In particular, so far this year Cisco Systems, Inc. (NASDAQ:CSCO) has acquired Intucell, a software company that allows mobile carries to manage and optimize networks; Cognitive Security, a research company involved in the field of network security; SolveDirect, a cloud-delivered software company specializing in management solutions, and finally, Ubiquisys a leading provider of intelligent 3G and long-term evolution (LTE) technologies.

Meanwhile, the cash pile continues to grow

Cisco is spending lots of cash acquiring competitors, but there is almost no risk that the company will run out of money. Cisco is a highly cash generative company, with a net income margin of 17%. Furthermore, on a cash flow basis, Cisco has converted an average of 22% of its revenues into free cash flow over the past four years, which is the reason behind the company’s rapidly growing cash pile. Indeed, over the last four years the company’s cash pile has grown at a 40% compounded annual growth rate.

Cisco is historically cheap

Meanwhile, Cisco is cheap by historic standards. Currently, the company is trading on a trailing-twelve-month price-earnings ratio of around 13, which is the lowest valuation the company has had during the past five years. What’s more is that from 2009 to 2011 Cisco had an average P/E of 17 and through 2012, the company’s P/E averaged 13.5.

Moreover, the company is currently cheaper that its closest peers in the Networking & Communication Devices sector, Juniper Networks, Inc. (NYSE:JNPR), which is trading with a P/E of 33.8 and Palo Alto Networks Inc (NYSE:PANW), which reported negative EPS last year and has an incalculable P/E, but has a forward P/E of 122. Furthermore, the average P/E for the six largest companies in Cisco Systems, Inc. (NASDAQ:CSCO)’s sector is at 39.

The market

Juniper Networks, Inc. (NYSE:JNPR) and Cisco serve almost 80% of the core router market and enjoy leadership positions in the market, with notable competitor Alcatel Lucent SA (ADR) (NYSE:ALU) recently entering the core router market with its Extensible Routing System 7950 family of core routers.

Alcatel Lucent SA (ADR) (NYSE:ALU) is now looking to take advantage of the industry transition and leverage its existing base of edge routers to find an opening in the core router market. Juniper Networks, Inc. (NYSE:JNPR) should be the most concerned by this as it derives most of its revenues from the routing division, unlike Cisco.

Juniper also still faces stiff competition from industry leader Cisco Systems, which usually introduces innovative products and charges high prices for these premium products. In addition, Juniper received some 10% of revenue from a single customer, Verizone.

Alcatel Lucent SA (ADR) (NYSE:ALU) is well positioned in the structurally growing optics and IP markets. Currently, the Optics and IP division represents 25% of the total networks segment revenue and is expected to represent 30% of the total networks segment revenue by the end of the fiscal year. Another key benefit for Alcatel is the surging growth in mobile broadband data traffic.

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