Is Cisco a Value Stock for 2013?

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

Cisco Systems' (NASDAQ: CSCO) impressive financial performance and fairly cheap valuation have made it a popular stock pick for 2013. The first quarter of Cisco’s fiscal year ended in October 2012. Revenue for the quarter was up 6% from the first quarter of the previous fiscal year, primarily due to higher services revenue. With the company generally holding cost increases in check (operating expenses were actually down, though this was primarily due to lower restructuring charges) earnings swelled 18%. A modest decrease in share count helped bring earnings per share to 39 cents. Cash flow from operations was also up in the quarter, approaching $2.5 billion.

Cisco trades at 13 times trailing earnings, and if we use the 39 cents per share figure from the most recent quarterly report and annualize it we get a crude P/E of 13 as well. Analyst expectations are for $1.96 in EPS for the current fiscal year, and the current stock price is only 10 times that figure. We’ve covered Cisco’s impressive cash flow generation, and when we look at the enterprise value implied by the current stock price it is only 6x trailing EBITDA, not as obviously low a multiple but still well within value territory for such a large and growing company.

59 hedge funds and other notable investors in our database of 13F filings owned Cisco at the end of the third quarter of 2012, which made it one of the most popular tech stocks among hedge funds (see the rest of the top ten). Renaissance Technologies, founded by billionaire Jim Simons, initiated a position of almost 14 million shares in Cisco between July and September (check out Renaissance's stock picks). Billionaire Ken Fisher’s Fisher Asset Management increased its stake in Cisco by 77% to a total of 38 million shares and this made Cisco one of the fund’s top five picks (find more of Fisher's favorite stocks). Sandy Nairn’s Edinburgh Partners was another major investor in the company.

Cisco’s peers include Alcatel Lucent (NYSE: ALU), Riverbed Technology (NASDAQ: RVBD), Palo Alto Networks (NYSE: PANW), and Juniper Networks (NYSE: JNPR). None of these companies has particularly stable earnings and earnings estimates which inspire confidence in us. Alcatel Lucent is actually supposed to be unprofitable this year and sink further into the red next year going by analyst expectations. In its report for the third quarter of 2012 the company disclosed that its revenues had come in slightly lower than a year earlier. We think that we’d avoid the stock. Palo Alto is also close to zero profitability, and even optimistic projections for future growth yield a forward P/E of over 100 (for the fiscal year ending in June 2014). It makes sense to see some growth here with revenue up over 50% in its most recent quarterly report compared to the same period in the previous fiscal year. However, we think that the current valuation has already captured enough growth that Palo Alto isn’t a buy either.

Riverbed and Juniper, meanwhile, have high earnings multiples when we look at trailing performance but Wall Street analysts insist that the next year will be much better. As a result their forward P/Es are in the teens, still at a premium to Cisco even ignoring the dependence on a large increase in net income. Riverbed has been improving on both top and bottom lines, but Juniper’s earnings actually collapsed in the third quarter of 2012 compared to Q3 2011. We don’t like either of these stocks and it’s possible that Juniper would make for a good short to pair with a long in Cisco.

Cisco appears to be at a good price, and certainly looks like a value stock compared to its peers. We think that investors should take a closer look at the company and consider it for their portfolio.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Cisco Systems and Riverbed Technology. The Motley Fool owns shares of Riverbed Technology. 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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