CSCO is down about -13% since the start of 2021. Where is its value price?

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 pandemic-driven trend since early 2020 that has seen corporate America shift to remote working models because of the pandemic gave a lot of bullish market momentum to some of CSCO’s competitors who have become media darlings through the end of last year, and even to CSCO itself, as it saw an increase in value of about 45% through 2021. Remote workforce solutions look to be a trend that is becoming 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 these exact solutions and services for more than two decades, from Wide Area Networking to video and 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 high point at the end of 2021 at around $64. Like most companies over the last two years, CSCO absorbed its share of operating challenges, including a sales decline that was attributed primarily to COVID-driven spending cuts on enterprise spending on IT infrastructure. The company’s last couple of earnings reports suggest 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 healthy, stable operating profile. 

Since the start of the new year, broad market uncertainty has hit the Tech sector hard, pushing CSCO off of that $64 high and down its current level at around $56. Does the dip mean that the stock’s current trading price could offer an attractive new value-based investing opportunity? 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 $237.1 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased 7.35%, while sales increased by 8.14%. In the most recent quarter, earnings fell about -4% while sales slid -1.72% lower. CSCO has a very healthy operating profile, with Net Income running at 22.44% of Revenues over the last twelve months. In the last quarter, that number strengthened to 23.1%.

Free Cash Flow: CSCO’s free cash flow over the last twelve months is $14.1 billion. This is a number that the company has historically managed to maintain at very healthy levels, despite a drop from $14.4 billion a year ago. The current number translates to a Free Cash Flow Yield of 5.99%.

Debt to Equity: CSCO has a conservative, manageable debt-to-equity ratio of .21. CSCO’s balance sheet shows more than $23.3 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, and which translates to an annual yield of about 2.64% 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 $43 per share. That means that at its current price, CSCO is overvalued by about -23%. It also puts the stock’s bargain price at around $34.50. It should be noted that just a few months ago, this same analysis yielded a fair value target price at $38 per share.

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 March at around $44 to its high in December at around $64. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stocked has picked up a lot of bearish momentum, particularly over the last two weeks, but appears to have found current support at around $55 based on the last two day’s low points. Immediate resistance is expected to at around $58, with additional resistance at around $59.50 based on previous pivot highs. A push above $59.50 should have near-term upside to around $62.75, where the stock pivoted earlier this month off of its most recent high. A drop below $55 should have limited downside at this stage, with next support likely to be between $53.50 and $54.

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 $59.50 could provide a signal for an aggressive, bullish investor to buy the stock or work with call options, with a short-term eye on $62.75 as a practical exit target. A drop below $55 could be a signal to consider shorting the stock or to buy put options, with a quick exit target at around $53.50 on a bearish trade.


X