Cisco Systems Inc. (CSCO) is one of the most recognizable and established companies in the Technology sector. With a market cap of about $200 billion, they are also one of the largest, if not THE largest player in the Networking & Communications segment. They are, without question, the standard that all other networking businesses are measured and compete against. No matter whether you’re talking about wired or wireless networking, CSCO is one of the companies that not only developed the standards and infrastructure the entire Internet is built on today, but that continues to lead the way into the future, including cloud-based computing and the next generation of technology in the so-called “Internet of Things” (IoT).
It’s ironic, perhaps that despite CSCO’s unquestioned dominance in its industry, the stock has mostly languished for nearly two decades. After riding the “dot-com boom” of the late 1990’s to a peak at around $80 per share, the stock cratered when that boom went bust, dropping to as low as about $8 in late 2002. From that point it never rose higher than into the low $30 range – at least not until the latter part of 2017, when the stock finally broke that top-end resistance. That pushed the stock to a high in May a little above $46 per share as Tech stocks generally prospered. 2019 started off pretty well for investors in the stock, as well; the stock increased about 30% from its late December 2018 low around $40 per share, and hit a new multi-year high a little above $58 in mid-July.
From that point, trade concerns in the latter part of 2019, followed by the COVID-19 that propelled the entire market into the first legitimate bear market in more than a decade pushed the stock all the way to a multiyear low at around $32 in mid-March. The stock has rallied about $10 from that point, which means that it is picking up some useful bullish momentum, and starting to form a nice short-term upward trend. Despite a strong fundamental profile, CSCO doesn’t really qualify as a good bargain under my normal definition of value; but current conditions do make an interesting case that it might be worth paying attention right now anyway.
For massive portions of corporate America, COVID-19 has meant sending white-collars workers home and setting up various telecommuting solutions to keep business going. That’s given an intriguing rise to companies that are getting quite a bit of buzz in the media as new, hip players in what I think will actually translate to a long-term, fundamental shift in the way business is done all over the world, even after shelter-in-place measures are removed and other restrictions are lifted. While they may not be getting a lot of buzz, the truth is that CSCO has been providing solutions and services for exactly this kind of condition for more than two decades, from Wide Area Networking to teleconferencing and more. CSCO is also a big player in the 5G world, which represents the next stage in remote connectivity in ways that we’re only beginning to appreciate. Those are reasons that I think CSCO’s current price could offer a very interesting opportunity for a patient, long-term investor right now.
Fundamental and Value Profile
Cisco Systems, Inc. (CSCO) designs and sells a range of products, provides services and delivers integrated solutions to develop and connect networks around the world. The Company operates through three geographic segments: Americas; Europe, the Middle East and Africa (EMEA), and Asia Pacific, Japan and China (APJC). The Company groups its products and technologies into various categories, such as Switching; Next-Generation Network (NGN) Routing; Collaboration; Data Center; Wireless; Service Provider Video; Security, and Other Products. In addition to its product offerings, the Company provides a range of service offerings, including technical support services and advanced services. The Company delivers its technology and services to its customers as solutions for their priorities, including cloud, video, mobility, security, collaboration and analytics. The Company serves customers, including businesses of all sizes, public institutions, governments and service providers. CSCO has a market cap of $175.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings grew by about 6%, while sales declined roughly -3.5%. In the most recent quarter, earnings declined -7.79% while sales dropped -8.7%. CSCO has a very healthy operating profile, with Net Income running at 21.44% of Revenues over the last twelve months. That number increased in the last quarter to almost 24%, which is a good sign that despite the negative earnings pattern, the company’s profitability remains on very strong footing.
Free Cash Flow: CSCO’s free cash flow over the last twelve months is nearly $15 billion. This is a number that the company has historically managed to maintain at very healthy levels and translates to a Free Cash Flow Yield of 8.33%.
Debt to Equity: CSCO has a conservative, manageable debt-to-equity ratio of .41. CSCO’s balance sheet shows more than $27 billion in cash and liquid assets versus about $14.5 billion in long-term debt. Servicing their debt is not a concern, and liquidity to pursue additional expansion or return value to shareholders via stock buyback or increased dividends is excellent.
Dividend: CSCO currently pays an annual dividend of $1.44 per share, which translates to an annual yield of about 3.4% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $37.50 per share. Strictly speaking, that means that CSCO is overvalued by about -10%. One of the metrics many analysts like to use is the PEG ratio, which takes a forward-looking view of a company’s earnings to project an expected value. As a general rule, I’m not a fan of this approach, given the way can change in unpredictable ways; but that could offer an interesting counterpoint in CSCO’s case if you factor in the catalysts that I mentioned at the top of today’s post. On the basis of PEG, the stock is actually discounted by about 16% right now, which could put a long-term target price a little above $48.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend from July 2019 to its low point in March of this year. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has built a nice short-term upward trend from that bottom, and began to consolidate in April right around the 38.2% retracement line. Late in the month, the stock appeared to break above that line, but is now dropping back below it, meaning that the consolidation range may be widening, but is still valid. That puts support at around $40, with resistance at about $43. A break above $43 offers some short-term upside to between $46 and $48 where the 61.8% retracement line sits, while a drop below $40 could see the stock drop to about $36, with additional downside to $32 if bearish momentum continues.
Near-term Keys: If the stock breaks above $43, you could have a good short-term opportunity to buy the stock or work with call options, with a profit target between $46 and $48 depending on the strength of bullish momentum. A drop below $40 would mark a good signal to think about shorting the stock or to buy put options, using a target price between $36 or even $32 to close out the trade and lock in profits. Based on my traditional metrics, I can’t call CSCO a solid value right now; but I do think this is an interesting case where an exception could be appropriate under current market conditions. A long-term target price at around $48 means about 16% upside in the stock on a long-term basis, which is fairly attractive.