CSCO is up more than 38% in the last year – could the rally keep going?

Cisco Systems Inc. (CSCO) is one of the most recognizable and established companies in the Technology sector. With a market cap of about $245 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).

The trend of the last year and a half that has seen corporate America shift to remote working models because of the pandemic has given a lot of bullish market momentum to some of CSCO’s competitors who have become media darlings. Remote workforce solutions look to be a trend that will are translating to a long-term, fundamental shift in the way business is done all over the world, even after the pandemic does eventually ease and economic activity resumes pre-COVID levels. CSCO may not be getting a lot of that media-generated buzz, but the truth is that this company 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 and IoT world, which represents the next stage in remote connectivity in ways that we are really only beginning to appreciate. Analysts are predicting a practically insatiable appetite from consumers and businesses alike for next-generation bandwidth, which bodes well for CSCO’s investments in that technology, and should be a big headwind in the months, and even years to come.

While it hasn’t attracted the same kind of media-driven attention that other tech companies have seen over the last year and half, CSCO’s fundamental strengths, which are considerable have attracted a healthy amount of investor interest, driving the stock into a long-term upward trend from a low at around $35 in November 2020 to a fresh, new 52-week high at yesterday’s close a little below $60. Like most companies during the pandemic, CSCO absorbed its share of operating challenges, including a sales decline that is attributed primarily to COVID-driven spending cuts on enterprise spending on IT infrastructure. The company’s latest earnings report suggests that some of those enterprise-level end markets are beginning to recover, even while other of its cloud-based solutions (which help enable many of the remote working models described earlier) have continued to provide healthy revenue growth. CSCO is a company with a balance sheet that features outstanding liquidity, very low debt relative to liquid assets, Free Cash Flow that has remained relatively stable despite the challenges of the past year and a half, and a operating profile that is strengthening. Does that mean that the stock’s current trading price could still offer an attractive value despite its push to a new yearly high? Let’s find out.

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 about $246.7 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased 5.56%, while sales increased by 8%. In the most recent quarter, earnings grew 1.33% while sales grew 2.52%. CSCO has a very healthy operating profile, with Net Income running at 21.26% of Revenues over the last twelve months. In the last quarter, that number strengthened to 22.92%.

Free Cash Flow: CSCO’s free cash flow over the last twelve months is $14.7 billion. This is a number that the company has historically managed to maintain at very healthy levels, despite a drop from $15.3 billion a year ago. The current number translates to a Free Cash Flow Yield of 6.03%.

Debt to Equity: CSCO has a conservative, manageable debt-to-equity ratio of .24. CSCO’s balance sheet shows more than $24.5 billion in cash and liquid assets against about $9 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 buybacks or increased dividends is excellent.

Dividend: CSCO currently pays an annual dividend of $1.48 (increased last year from $1.44) per share, which translates to an annual yield of about 2.54% 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 $38 per share. That means that at its current price, CSCO is overvalued by about -35%. It also puts the stock’s bargain price at around $30.50.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The diagonal red line traces the stock’s upward trend from its low last November at around $35 to its high at yesterday’s close at around $58.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has picked up bullish momentum in the last few days, driving up above its most recent resistance at around $56, and which now marks current support. Using the stock’s trading distance from a consolidation range in late June and early July at around $53 to the recent push above $56 as a reference suggests that the stock may be nearing resistance in the $59 price area. It also suggests that a push above that level could have near-term upside to about $62 per share.

Near-term Keys: Based on my traditional valuation metrics, I can’t call CSCO a value right now; but I do think there are a number of other elements – continued remote workforce services and solutions, 5G implementation over the next year or so, and continued improvement in corporate, enterprise spending on IT infrastructure, to name just a few – that aren’t being factored into my value analysis because of their forward-looking nature. If you’re looking for a way to work with a 600-lb gorilla in the Tech sector with a stable, attractive dividend, those could be good enough elements to make this an exception to the normal value-based argument. If you prefer to work with short-term trading strategies, a near-term bullish trade doesn’t look very attractive right now; however a push above $59 could provide a signal for an aggressive, bullish investor to buy the stock or work with call options, with a short-term eye on $62 as a practical exit target. A drop below $56 to could be a signal to consider shorting the stock or to buy put options, with a quick exit target at around $53 on a bearish trade.