Is This Technology Giant a Buy?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The tech market is a turbulent one but I think the perfect stock and the perfect time to buy this stock has come. I’m talking about Cisco Systems (NASDAQ: CSCO). The company manufactures and sells networking equipment to businesses around the world. With the economy in a turn-around and cloud computing on the rise worldwide it would seem that now is the time to buy Cisco.

The Divisions

Cisco’s largest division is the sale of network switches. Switches are sold by Cisco to anyone that plans on running some form of server. This division makes up somewhere between 20-25% of the company’s value. Both top layer and bottom layer switch markets are projected to grow through the end of the decade.

Outside of the switches division, Cisco also engages in servicing companies with networking based issues. Their service division makes up 20% of the company’s revenues and that division will likely see growth as more and more server build outs happen worldwide.

Other divisions at Cisco include the sale of routers, network security solutions and a variety of other network based products. The enterprise router market will grow and Cisco will try to keep at the top of their game in that market during the growth.

The Fundamentals

Cisco has a mammoth $45 billion in cash & cash equivalents on their balance sheet. If you factor out their $16 billion in debt then you are left with $29 billion net cash, $5.40 per share. This cash can be used by the company to maneuver and stay ahead of the competition in the long haul.

Aside from the cash you’ll find that Cisco is currently trading at 12 times their free cash flow while carrying a 17.62% profit margin.

A quick look at the price-to-book ratio shows us that Cisco is trading at just above 2.0 today. Price-to-earnings is 13.14 over the last twelve months and the PEG Ratio is 0.39 signaling that this stock could be undervalued based upon expected growth.

Cisco pays a dividend of $0.56 which yields 2.7% per year. 

Comparisons

Comparing Cisco to some of the other major companies in the technology market can help us see why they may be the better company to invest in. I have decided to add Juniper Networks (NYSE: JNPR)Alcatel Lucent (NYSE: ALU) and Microsoft (NASDAQ: MSFT) into the mix. 

<table> <tbody> <tr> <td>Company </td> <td><strong>P/E Ratio</strong></td> <td><strong>P/B Ratio</strong></td> <td><strong>PEG Ratio</strong></td> <td><strong>Analyst Rec. </strong></td> </tr> <tr> <td>Cisco</td> <td>13.11</td> <td>2.05</td> <td>0.39</td> <td>1.84</td> </tr> <tr> <td>Microsoft</td> <td>14.76</td> <td>3.33</td> <td>1.6</td> <td>1.78</td> </tr> <tr> <td>Juniper Networks</td> <td>57.51</td> <td>1.50</td> <td>4.3</td> <td>2.48</td> </tr> <tr> <td>Alcatel Lucent</td> <td>N/A</td> <td>0.72</td> <td>N/A</td> <td>3.27</td> </tr> </tbody> </table>

As you can see, Cisco based on these numbers looks to be the best. Alcatel Lucent and Juniper are both competitors in Cisco's space and I added Microsoft in so we could take a look at what many consider who the better value stock is in technology.

Downside?

When investing you should always take a look at any downside risk and I don’t think Cisco is immune. Cisco could suffer from any sort of downturn in the worldwide economy. The troubles in Europe, especially if they turn for the worse, could lead to less spending on infrastructure and network build out which would not work out too well for Cisco. Cisco may also find issue, like any company would, if they lose their dominance over the networking market. This is a longshot though and I think they will be quite safe for a few years to come.

Final Verdict

I think the stock is a buy. It offers a dividend, it offers great growth potential, and it even has lots of cash to help keep the company on the right track. I don’t believe demand for servers and networking equipment will stop any time soon so I would definitely think about buying this stock.


Ash1402 has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services recommend Cisco Systems and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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