The Cisco Story - Worth Your Money?

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

In a previous post, I wrote about the fact that everything and everyone, including corporations, have a story.  I then went on to say that stories are typically multifaceted, and every one story has a number of contributing smaller stories, which come together to tell that greater story.  And, as a geeky accountant, I find it exciting that ingrained within every company’s greater story is the story of its financial statements.

In this post, I want to highlight a few plots within the financial narratives of Cisco Systems (NASDAQ: CSCO), Juniper Networks (NYSE: JNPR), Globecomm Systems (NASDAQ: GCOM), and Riverbed Technology (NASDAQ: RVBD), as well as the Networking & Communication Devices industry in general.  Specifically, we'll take a look at revenue growth and gross margins to see how successful the companies have been at not only generating revenue, but also at managing the corresponding costs to do so.  We'll also evaluate each company's debt to equity ratio to see how financially stable they are, and their return on equity to see if they’re adding value to shareholders.  Lastly, we’ll look at their price to earnings and price to free cash flow ratios to see how well they're priced.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>CSCO</strong></p> </td> <td> <p><strong>JNPR</strong></p> </td> <td> <p><strong>GCOM</strong></p> </td> <td> <p><strong>RVBD</strong></p> </td> <td> <p><strong>INDUSTRY</strong></p> </td> </tr> <tr> <td> <p>Rev. Growth (5 Yr. Avg.)*</p> </td> <td> <p>5.14%</p> </td> <td> <p>10.43%</p> </td> <td> <p>18.49%</p> </td> <td> <p>31.19%</p> </td> <td> <p>7.38%</p> </td> </tr> <tr> <td> <p>Gross Margin (5 Yr. Avg.)*</p> </td> <td> <p>66.90%</p> </td> <td> <p>69.90%</p> </td> <td> <p>26.40%</p> </td> <td> <p>78.10%</p> </td> <td> <p>65.70%</p> </td> </tr> <tr> <td> <p>Debt to Equity (MRQ)*</p> </td> <td> <p>0.32</p> </td> <td> <p>0.14</p> </td> <td> <p>0.09</p> </td> <td> <p>0.00</p> </td> <td> <p>0.30</p> </td> </tr> <tr> <td> <p>Return on Equity (TTM)*</p> </td> <td> <p>15.70%</p> </td> <td> <p>3.50%</p> </td> <td> <p>13.00%</p> </td> <td> <p>9.00%</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>Price/Earnings (TTM)*</p> </td> <td> <p>12.60</p> </td> <td> <p>33.80</p> </td> <td> <p>8.40</p> </td> <td> <p>58.50</p> </td> <td> <p>18.00</p> </td> </tr> <tr> <td> <p>Price/Free Cash Flow (TTM)*</p> </td> <td> <p>11.70</p> </td> <td> <p>26.20</p> </td> <td> <p>7.30</p> </td> <td> <p>73.00</p> </td> <td> <p>15.40</p> </td> </tr> </tbody> </table>

*Data obtained from

The Cisco Story

As you can see from the above chart, the Cisco story (or at least the financial performance chapter) starts off slow, but turns out to be a good one.  Let’s face it, Cisco’s financial story begins with a less-than-impressive five-year average revenue growth of only 5.14%, which is not only less than industry average, but it’s significantly less than Globecomm’s 18.49% and Riverbed’s staggering 31.19%.  And the slow beginning doesn’t stop there, as Cisco’s 66.90% gross margin, while slightly above industry average, is still less than Juniper’s 69.90% and Riverbed’s impressive 78.10%.

Cisco’s story continues to underperform its contemporaries when looking at debt to equity ratios, as Cisco’s 0.32 is more than Juniper’s, Globecomm’s, and Riverbed’s combined.  Although Cisco lags behind its competitors here, it’s worth noting Cisco’s debt to equity is not indicative of a poor financial condition.  In fact, the opposite may be said, as Cisco has managed to both repurchase stock and pay shareholders decent dividends as of late.

The turning point in the otherwise mediocre Cisco story comes with its return on equity.  Cisco achieved an impressive 15.70% return, which is slightly greater than Globecomm’s 13.0% and significantly better than Juniper’s 3.50% and Riverbed’s 9%.  The best part about this, though, is the price associated with Cisco, as its P/E and P/FCF are only 12.60 and 11.70, respectively.  While Riverbed outperformed the competition in all other aspects (and appears to be a great company), its P/E of 58.70 and P/FCF of 73 are simply indicative of an overvalued company.  Cisco’s cheap price receives competition only from Globecomm, as Globecomm managed a decent 13% ROE and is quite cheaply priced at a P/E of 8.40 and a P/FCF of 7.30.

Cisco's Story a Worthy One

Again, the financial stories of these companies are only a small part of their greater story, and much more research and analysis are necessary to form an investment decision.  However, based on this quick analysis of Cisco’s financial narrative and that of its competitors, it’s clear that the story, while beginning slow, ends well.  But, it’s not without competition, and in this case I would consider making room on my investment bookshelf for both Cisco and Globecomm.

mattmcmichen has no positions in the stocks mentioned above. The Motley Fool owns shares of Riverbed Technology. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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