How Much Is Mighty Cisco Really Worth?
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
Mighty Cisco Systems (NASDAQ: CSCO), the $108 billion market cap network technology force, is in the end game of transformation from a growth stock to blue chipper with its listing on the DOW 30 and its recent establishment of a small dividend. The company has a dominating share of approximately 60.3% of the overall Ethernet switching market as well as 54.9% of the overall routing market and looks unlikely to lose their position anytime soon. So with it playing on a new field, what is its true value? I analyzed the company on a basic value basis to see how much the company is really worth.
Cisco's recent price has been near $20 towards the higher end of its $13.30-$22.34 52-week trading range. It lists its earnings per share as $1.15 for a price to earnings ratio of 17.4 and now pays a $0.06 quarterly dividend that produces a 1.19% yield. Also in the trailing twelve months Cisco's price comes in at a 14.6 ratio to sales, 2.5 against tangible book value and 14.6 as a ratio against sales.
These valuation numbers can be compared against several peer groups. Against the other members of the DOW Cisco comes in generally in line with the 14.8 average price to earnings ratio. Against the company's peers in the routing market Cisco sits at a discount, most are in the 20-60 price to earnings ratio, as an example Juniper Networks (NYSE: JNPR) at approximately 28.5. This shows the market recognizes the more mature stage of Cisco's development with its sheer size against the market limiting how much it can grow.
Operationally Cisco has strong numbers for the trailing twelve months: gross margin was 61%, operating margin was 17.24% while net profit margin stands at 14.49%. I expect margins will be squeezed to some extent in 2012 due to additional competition and the poor macroeconomic environment we currently have, but it should not have any major impact on the bottom line and expect Cisco to enjoy moderate growth, outperforming their industry peers in 2012 by a small amount.
Financially Cisco has a hefty $25 billion net cash, which translates to a nice $5 cash per share, and had an impressive $10 billion net operational cash flow in 2011. The current ratio stands at 3.3 and the quick ratio 3.2 while its long term debt to equity stands at a mere 0.3. In fact it funds its dividend with a miniscule 0.4 payout ratio. It could easily quadruple the dividend and not even feel it. Annual sales are reliably over $40 billion and growing. In short it has an envious financial position and is well armed to go in any direction it wishes to go.
But where to go? True, the market in emerging Asian economies like China and India are growing comfortably, but the US and Europe's macroeconomic situation looks weak for at least for the next 18 months. The company so far has been able to build on its core strength of hardware and software and avoided any pressure to diversify into consumer goods an services where it has no expertise.
That is one reason why establishing the dividend, small as it is, may be so important. There is still room for comfortable growth in its core business model but it now requires less investment and resources in the future operating environment. That leaves one option of entering new markets or purchasing other companies, and drastically changing its business model away from a dominant provider to some form of holding company. The other option is to throttle back and accept growing at a more staid level.
The dividend could attract more income investors. If the company likes the effect the company can well afford increasing the dividend over the next few years., which should pump up the share price in the future as more income funds an investors add this safe company to their portfolio.
In the final analysis Cisco sits comfortably between the high technology flyers selling at higher valuations versus the older blue chips, and considering its cash position and bullet proof balance sheet, strong market position and expectations for moderate growth, a share price between $22-$26 seems fair for current market conditions. Since current price is a slight discount, it is a safe and conservative play for value investors. If Cisco's board decided to increase their dividend, the stock should become a strong play for long term income investors and the stock should begin several years of advancing prices.
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