A Good Time to Consider Investing in Cisco
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cisco (NASDAQ: CSCO) is basically in the business of connectivity; from the company´s 2011 annual report:
We design, manufacture, and sell Internet Protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use. We provide a broad line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Our products are designed to transform how people connect, communicate, and collaborate.
The industry has been very attractive for many years and Cisco benefited enormously from the growth opportunities that came with internet and the information technologies revolution. During the dot com bubble Cisco was for a brief time the biggest company in the world in terms of market capitalization. But regardless of crazy bubble valuations, Cisco has been a remarkable success story through the years.
However, competition has increased notably in the last years, and Cisco saw its growth and profitability affected by lower price offerings from competitors and decreased spending in technology from customers around the world, especially in the government sector.
Huawei in China has been a strong competitor focusing in the low price segment, Hewlett-Packard (HPQ) is competing in switches and Juniper Networks (JNPR) is a traditional competitor in routers and other businesses. The period 2010 – 2011 has been quite tough for Cisco and its investors, this caused the company to embark in a deep restructuring to better adapt to the changing environment.
Interestingly, Cisco´s restructuring seems to be bearing its fruits: the company reported better than expected sales and earnings per share in the last quarter. Sales grew by an 11% annually and earnings per share were of 40 cents versus 27 cents in the previous year. Cisco increased dividends by a 30% which can be interpreted as a sign of confidence in the future.
These results are especially interesting if we consider that Juniper reported decreasing sales last quarter, revenues fell by a 5.8% versus the same quarter in previous year, so Cisco seems to be gaining market share from competition in a tough environment.
Long term perspectives look promising for Cisco, demand for connectivity products and services should be supported by growing needs from customers in every segment. Although Huawei can be a tough competitor in the residential segment where customers may choose lower priced products, the corporate sector has higher quality standards and Cisco is the leader in that segment
Shares of Cisco are attractively valued at a forward P/E bellow 10.5, the company has a very solid balance sheet and margins are quite healthy with gross margins above 60% and operating margins of more than 17%. This may be a good time to consider some exposure to the leader in the connectivity business, an industry that should keep growing nicely over the long term regardless of cyclical conditions.
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