Is This Tech Giant Making a Comeback?

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

The latest announcement of Cisco's (NASDAQ: CSCO) pending acquisition of software Wi-Fi networking firm Meraki for $1.2 billion highlights a recent stint of promising acquisitions that have improved Cisco's portfolio in the IT sector. The fact that Google (NASDAQ: GOOG) was one of the first investors in Meraki also bodes well for its long-term growth projections. Meraki was formed in 2006 and was funded by Sequoia Capital and Google. The deal is expected to close in the second quarter of 2013 and is significant enough to contribute to an uptick in Cisco stock in the short-term.

This acquisition allows Cisco to expand into the high margin software sector with recurring revenue. As demands for high speed networks and remote access increases, the Meraki acquisition will help drive growth for the long-term. Meraki's customer base increased from 120 to 330 within the past year. Around 80% of Cisco's sales each quarter come from new business. The recent acquisitions aimed at improving Cisco's networking, wireless and cloud computing portfolios are reasons to be bullish on this undervalued firm's transition from primarily communications services into a top-tier IT provider.

Cisco's mid-November announcement of its impending acquisition of Cloupia is another example of recent acquisitions that will improve growth projections looking forward. This acquisition bolsters Cisco's portfolio in the data infrastructure and cloud computing sectors. Cloupia's services allow enterprises and service providers to take advantage of a comprehensive networking portfolio to effectively manage operations on a virtual platform. Companies like DataClub, that sell cloud space, are popping up in large numbers. Enhancing Cisco's cloud technologies, virtualization and data center offerings, which helps meet end user demand, are the key catalysts behind improving earnings and revenue growth. The agreement is expected to close in the second quarter of 2013 as well.

Cisco's position as the leading supplier of high performance internet networking systems and solutions during a period when sophisticated mobile devices and high speed wireless networks are increasing in demand is reason to be bullish on Cisco's future growth prospects. New products accounted for 48% of Cisco's sales, routers accounted for 18% and switches accounted for 32% of the firm's sales.

Cisco is focusing more on mobility, clouds and providing the intelligent network. Cisco remains undervalued since the recession, however its earnings growth has averaged 14.7% per year since the recession. The growing IT firm has strong financials, around $49 billion in cash and a few recent acquisitions with strong long-term growth potential.

Aside from its continuous rollout of new products, Cisco has a size and scale advantage over its competitors as well. The firm is also focused on reducing operating costs and divesting non-core operations so it can effectively offer premium products that can compete with the more moderately priced brands like Dell (DELL)Juniper (NYSE: JNPR) and Hewlett-Packard (HPQ). Cisco's new product segment is expected to be the primary driver of future growth bolstered by the recent acquisitions throughout the past few years.

Cisco is getting ahead of the next boom from growing enterprise demand for networking and virtual services. Cisco is positioning itself to completely service the IT needs of small to mid-size businesses, conglomerates, service providers, like AT&T, and domestic and international municipalities alike. Investors should act in the near term; Cisco may benefit as wireless carrier network construction and telecom and cable provider broadband expansions ramp up and become more common place around the world.

On a conference call in November, CEO John Chambers described a new focus for Cisco. The IT firm intends to offer cellular base stations that would improve carrier networks in heavily populated areas. Cisco will begin in small scale; it will work with service providers to combine 4G, 3G or Wi-Fi with its platform and applications. Major carriers like AT&T and Sprint's commitments to 4G network expansions bode well for Cisco's long-term networking revenues. It's rare to find such an established firm with so many opportunities for near term growth trading at such a low price per share and low valuation.

Microsoft (NASDAQ: MSFT)IBM (NYSE: IBM)Oracle (ORCL) and Juniper are some of the other firms to consider when reviewing Cisco's metrics. Cisco's 11.9 price-to-earnings ratio is the lowest among these competing firms. Only Juniper has a lower trading price than Cisco. Only Microsoft's 49.2 million average volume is higher than Cisco's 38.6 million trade average amongst these competitors. The low trading price, low valuation and high average volume indicate the stock is undervalued.

Cisco's EPS is around $1.55 and its 27.5% EPS increase in 2012 is the highest among the firms. IBM's current $13.89 EPS is the highest among these firms. Cisco's 0.31 debt-to-equity ratio and earnings margins are all comparable but slightly lower than Oracle's corresponding ratios. Cisco's metrics are comparable to its competitors while it's potential for revenue growth form the enterprise sector is greater and its trade price is significantly lower. The stock has increased around 2.3% since its last earnings release.

Since the recession, Cisco has had one of the lowest price ratios and lowest trading prices amongst its peers. Cisco is consistently undervalued , but the firm recently had a strong quarter as revenue increased 6% and operating income increased 20% year-on-year. I have no reason to believe this trend won't continue. Most of Cisco's revenue comes from the stable US markets, around 20% of Cisco's revenue comes from Europe and its Asian market grew 10% year-on-year. Cisco's stock increased nearly 9% shortly after its last earnings release. As the recent acquisitions begin to close and more new products are launched it's fair to expect an even bigger rally surrounding the next earnings release in 2013.


StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, International Business Machines, and Microsoft. Motley Fool newsletter services recommend Google, International Business Machines, and Microsoft. 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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