It is difficult to directly compare Cisco to any of its peers, because of its size and product dominance, but I would say the next largest networking equipment company is Juniper Networks, Inc. (NYSE:JNPR). Interestingly enough, Juniper has also had a similar upside move to Cisco, bottoming in July and rising sharply since. Juniper trades at 26.3 times earnings; however, it is projected to grow earnings a nice 14.5%.
To compare valuations, I’m going to use my rule of thumb and compare the company’s earnings multiple to twice the P/E. I like to invest in companies whose P/E is significantly less than the doubled growth rate. Juniper has a P/E of 26.3 compared with a doubled growth rate of 29, so its P/E number is 9.3% less than the growth doubled, a good sign. However, Cisco’s P/E of 11.3 is 11.7% less than its doubled growth rate, making it the “cheaper” of the two. And this is without taking into account Cisco’s more favorable cash position.
In terms of Ethernet switching, as mentioned before, Cisco is dominant, with the number two in the market being Hewlett-Packard Company (NYSE:HPQ), since it acquired 3Com for $2.7 billion back in 2010. HP and Cisco have actually become “rivals” to some extent. First, Cisco decided to come out with its own data center servers, when it used to partner with HP (and IBM) on this. Then HP made the aforementioned acquisition and got into Cisco’s switching business. Next, Cisco stopped using HP as a reseller of its products, and HP forbid Cisco from its data centers. Sounds kind of like a high school sports rivalry.
Anyways, being that they are in the middle of a major restructuring, which may or may not pan out, HP doesn’t work as an investment other than as a speculative play. There is one thing that you can assume when a stock falls steadily from around $50 to the teens: the pressure is to the downside. Until a clear bottom is made, HP is not a safe long-term play.
In conclusion, Cisco is a dominant industry leader and is incredibly well-valued right now. As long as earnings numbers are decent, Cisco should have nowhere to go but up in the future. Of course, if the company disappoints this quarter, it may create a great buying opportunity in a tech leader that has become a nice income play.
The article Dominance, Value, And A Nice Yield originally appeared on Fool.com and is written by Matthew Frankel.
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