Cisco Is Still Performing

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

In the information age, it’s all about communication. For this worldwide communication to operate smoothly, networking devices are a crucial cog in the machine. Moreover, as internet penetration continues to rise in developing countries, demand for these products will increase. Cisco (NASDAQ: CSCO) is one of the world’s largest providers of networking solutions. Currently, the stock appears to offer good value for money, and also presents a compelling growth opportunity due to its diversity.

Company Overview

Cisco has a massive market cap of $106.77 billion and employs over 66,000 people, making it one of the larger companies traded in the US. It is a hugely diversified networking and communication devices company, producing routers, switches, wireless products, set-top boxes, security products and solutions for cloud-enabled businesses. The stock is up about 12% in the last year and has a beta of 1.24, as well as a healthy 2.78% yield.

Earnings and Cash Position

Cisco earnings over the last few years have been impressive to say the least. In fact, EPS has beaten analyst expectations for seven consecutive quarters. In the most recent earnings report, the company reported net income of $2.6 billion, which represented a growth of 11%. Revenue came in at $11.9 billion, which represented a rise of 6%. YoY revenue growth is in the double-digits coming in at 12%. The company’s cash position of also enviable. While the firm has a total debt to equity ratio of almost 31, it is sitting on $45 billion worth of cash, which should be more than enough to fuel further acquisitions and R&D needed to stay ahead of the competition. The company recently completed the acquisitions of Meraki and Cariden, which reflect the desire to continue investing in software solutions to offset potential weakness in the hardware division.

Valuations and Metrics

Cisco trades at about 13x earnings, which is a substantial discount to the 18.3x industry average. The forward P/E is even more attractive at 9.6x earnings. The price to book is a very reasonable 2.03. The operating margin is very strong at 22.8% and return on equity is a healthy 16.7%. These solid metrics are certainly ahead of Juniper Networks (NYSE: JNPR), a key competitor. Juniper trades at a huge 55.5x earnings with a substantially lower operating margin of 9.5%. The return on equity is also disappointing at 2.67%. Juniper has a little less debt, but also less cash on hand with about a third of its market cap in cash compared to Cisco’s almost 50%.

Bottom Line

Where some tech companies have stumbled and fallen in the tough macro-economic environment, Cisco continues to perform well due its diversity combined with scale advantages. With plenty of cash on hand to continue funding acquisitions and product development, earnings have also consistently come in above analyst expectations. To top it all off, the company currently trades at a discount compared to the industry and the broader market, making it a compelling investment option. The firm should be able to continue this strong performance going into 2013. 

 


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