Is Cisco Systems, Inc. (CSCO) A Buy Now?

How much is Cisco worth?

During fiscal 2012 Cisco generated $10.365 billion in free cash flow. This works out to about $1.92 per share based on today’s diluted share count. I’ll do a simple discounted cash flow calculation, using discount rates of 12% and 15% to define a fair value range, to estimate the fair value of a share of Cisco. Assuming that the FCF grows by 6% annually for the next 10 years and by 3% annually after that, I arrive at a fair value range of $25.68 – $32.81 per share. Currently trading at around $24 per share Cisco is still below the lower bound of my fair value range even after the big run up.

Cisco’s moat is intact

Cisco sells the type of product that presents significant switching costs to its customers. This has allowed Cisco to maintain a massive market share in its core businesses even as it faces competition from companies like Juniper Networks, Inc. (NYSE:JNPR). And the company is spending heavily to gain market share in new areas, such as wide area networks, from companies like Riverbed Technology, Inc. (NASDAQ:RVBD). Cisco is about 10 times larger than Juniper and about 50 times larger than Riverbed in terms of revenue, and with far more resources available I’d bet on Cisco Systems, Inc. (NASDAQ:CSCO) every time over a smaller company. Cisco also has far better margins than either of these competitors, as can be seen below.

Company Operating margin Net income margin
Cisco 21.85% 17.46%
Juniper 7.06% 4.28%
Riverbed 11.47% 6.57%

Based on fiscal 2012 results

On the one hand, companies like Juniper Networks, Inc. (NYSE:JNPR) and Riverbed Technology, Inc. (NASDAQ:RVBD) could grow to be much larger since the companies are so small today. But on the other hand, they’re competing with a behemoth with more money than it knows what to do with and a dominant share in many different markets. It seems like Cisco is the clear choice here.

The bottom line

Cisco Systems, Inc. (NASDAQ:CSCO) is still undervalued, but it seems that people have begun to realize this. With the stock surging by 12% on a slight earnings beat, the expectations were apparently quite low. Slow, steady growth coupled with share repurchases and an above average dividend makes Cisco a great stock to own.

The article Waking a Sleeping Giant originally appeared on Fool.com and is written by Timothy Green.

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