Is This Stock the Tech Play of the Year?

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

Tech stocks have been one of the worst performing groups this year. In fact, these stocks have underperformed other stock sectors by 11% over the past year, and, for the first time in 17 years, the sector's forward P/E ratio is lower than the market's average. Some analysts are suggesting that it will be the tech sector that will lead the rally in Q2 2013. Investors looking for opportunities in the sector should look into Cisco Systems (NASDAQ: CSCO), the world's leading IP-based networking company.

Valuation

With regards to valuation, Cisco's stock trades at a P/E of 12.38, which is slightly below market average. However, when taking into account that competitors like Alcatel Lucent (NYSE: ALU) or Hewlett-Packard (NYSE: HPQ) have no P/E ratios as EPS were negative, and other competitors like Juniper Networks (NYSE: JNPR) are trading at very high P/E ratios (52), Cisco Systems does seem to have an edge. When taking into account future earning estimates, Cisco seems relatively attractive: its forward P/E is 10.26, better than most of its competitors (with the exception of Hewlett-Packard's 5.84). If you bring growth into the equation, Cisco also looks moderately attractive, with a PEG of 1.50. However, the P/B ratio of 2.07 is higher than that of most of its competitors. All in all, Cisco Systems to be slightly undervalued, especially compared to most of its competitors.

Analysts

Analysts are slightly bullish on Cisco Systems. The stock has an average recommendation of 2.20 (overweight), and an average price target of $23.52, which implies a potential 9.2% upside from current price levels. With regards to average recommendations, analysts seem to clearly favor Cisco over the rest (most of its competitors have a hold or underweight average rating). However, stocks such as Juniper Networks or Alcatel seem to have slightly higher potential upside, at least according to their average price targets. At any rate, some of the analyst reports on stocks like Alcatel are quite dated, so investors should take this information with a grain of salt.

Dividend

Cisco is one of the highest dividend paying blue-chip tech stocks. It currently pays a dividend of $0.68/share, which works out to an annualized yield of 3.16%. The company has been paying a dividend to its shareholders since March 2011, and has been boosting its dividend regularly since early 2012. There is no reason why the company should discontinue upping its dividend, so additional dividend increases would not be surprising.

  P/E Fw P/E PEG P/B EPS gr. Q/Q Avg Rec Avg PT (%imp upside) Div Yield
CSCO 12.38 10.26  1.50  2.07  46.04%  2.20  $23.52 (+9.2%)  3.16% 
ALU  - 145  1.32  -387%  2.89 $1.64 (+13%) 
HPQ  - 5.84  1.78  -14.27%  3.27  $19.24 (-8%)  2.54% 
JNPR  52 14.18  3.42  1.36  3.34%  2.50  $21.86 (+16.7%) 
Edge  CSCO_ HPQ  CSCO ALU  CSCO  CSCO  JNPR  CSCO 

Price movements

Cisco suffered during the 2008-2009 financial crisis, reaching $14.18 in March 2009. However, it recovered nicely during 2009-2010, only to fall again in mid-2010, driving the stock back to pre-financial crisis levels in 2011. After a roller-coaster year in 2012, the stock seems to be on a clear path to recovery. It is currently just 1.19% off its 52-week high of $21.80, and 47.33% above its 52-week low of $14.62. It has gone up 10.52% YTD. However, even though the stock is near its 52-week high, it is still far from its price during the .com bubble, when it reached $79.30.

At any rate, the stock is experiencing positive momentum, and the stock has had a stable, un-bubble-like upward trend that could likely continue this year.

Earnings looking ahead

Despite economic challenges, the company has been able to deliver record earnings and revenue for eight straight quarters. The company's gross margin (62%) and operating margin (22.32%) are stronger than those of over 90% of the companies in the sector. Both revenue growth and operating income have grown healthily over the last few years, and the company has almost $50 billion in cash, versus $16 billion in debt.

Many analysts seem to believe that this growth trend should continue. Cisco's strategic acquisitions of Meraki (a leading cloud-managed network infrastructure company) and Cariden (a network traffic software firm) should solidify its lead in the industry and allow it to reap the rewards in the cloud-computing era.

The bottom line

Cisco Systems seems undervalued relative to its growth potential. Attractive valuations, a juicy dividend, a history of improved margins and revenue, good momentum, and the potential for high growth make this stock definitely worth considering.


Alex Bastardas is long on Cisco Systems. The Motley Fool recommends 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

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