A Stock Held Down For 11 Years That is Now Arranged For A Breakout

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2012 draws to a close, I would like to pinpoint a global leader in the communications and information technology industries: Cisco Systems (NASDAQ: CSCO).

 

Strengths:

  • Solid Revenue Growth: In 2007, Cisco reported revenue of $35.0 billion; in 2012, the company announced revenue of $46.1 billion, representing year over year annual growth of 5.66%; this trend of solid revenue growth is widely anticipated to sustain into the future, with projections placing 2015 revenue at $54.4 billion. This growth is a result of an increase in the value of the main markets Cisco operates in

 

  • Dividend: At the moment, Cisco pays out quarterly dividends of $0.14, which puts the dividend as yielding 2.82% annually
  • Institutional Vote of Confidence: 72% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Double Digit Margins: Currently, Cisco possesses a net profit margin of 17.46%, representing a strong and profitable company; these margins are a result of Cisco's pricing power and premium offerings
  • Historically Low Valuation: Cisco currently carries a price to earnings ratio of 12.78, a price to book ratio of 2.05, and a price to sales ratio of 2.29, all of which point to a company trading with a historically low valuation

 

  • Cash & Equivalents: At the moment Cisco possesses about $4.8 billion of cash and cash equivalents plus roughly an additional $40 billion in short term investments on their balance sheet, a major upside to the business.

 

  • Sheer Size & Diversity: Cisco is valued at $105.28 billion, employs 66,639 people, and operates in all the major markets of the world, and with this sheer size and diversification comes a certain level of stability and predictability

Weaknesses:

  • Debt: At the moment Cisco possesses about $16.3 billion of debt on their balance sheets, a major downside to the business

 

  • Expanding Operating Expenses: When a company expands, its operating expenses grow; however, over the past 10 years operating expenses have outgrown revenue, an ominous sign

 

  • Falling Network Switches Gross Profit Margin: Network switches, the largest segment of Cisco’s business, has been experiencing a drop in gross profit margins over the past years, with margins going from 65% in 2008 to currently 61%. This trend of falling gross profit margin is widely expected to continue into the future

 

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 2011, Cisco has steadily increased its payouts, and further dividend growth is highly probable

 

  • Acquisitions: In December 2012, Cisco acquired Meraki Incorporated, and further acquisitions in the future are probable and should fuel growth
  • Innovation: In 2012, Cisco poured about $1.36 billion into research and development, in the hope that innovations will fuel growth into the future; a prime sector of opportunity is cloud technology

 

  • Growth in Network Switches Industry: The largest segment of Cisco’s business is the network switches sector, and in the coming years this industry is poised to experience explosive growth, fueling Cisco’s overall company growth

 

Threats:

  • Competition: The various industries Cisco operates in are very competitive, and this fierce competition to offer the best product for the least amount of money can lead to margin compression
  • Stagnant Economic Landscape: In an economic landscape riddled with such uncertainty and stagnation, companies are less willing to pour money into reinvesting in their business, hurting Cisco
  • Dropping Market Share Across the Board: In three main segments of Cisco’s business, network switches, routers, and network security, Cisco’s market share is falling, and is projected to continue to fall into the future

 

Competition:

Major publicly traded competitors of Cisco Systems include Ericsson (NASDAQ: ERIC), Alcatel Lucent (NYSE: ALU), Juniper Networks (NYSE: JNPR), and Motorola Solutions (NYSE: MSI). All of these companies offer products or services that are similar, if not identical, to those of Cisco. Ericsson is valued at $33.18 billion, pays out a dividend yielding 3.46%, and carries a price to earnings ratio of 15.91. Alcatel Lucent is valued at $3.13 billion and pays out no dividend. Juniper is valued at $10.32 billion, pays out no dividend, and carries a price to earnings ratio of 56.92. Motorola is valued at $15.37 billion, pays out a dividend yielding 1.90%, and carries a price to earnings ratio of 23.27.

The Foolish Bottom Line:

Cisco is a diversified technology giant that possesses solid revenue growth and a growing dividend. However, the company possesses a declining presence in its main segments, a bad sign. The company has been trading in the same price range since its collapse in 2000, despite producing record revenues and earnings. Cisco is trading at a historical discount, and because of this it presents a tremendous opportunity for investors.  


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cisco Systems. 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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