Tuesday, November 26, 2013

Cisco: Fundamental Value

This leading maker of computer networking gear plunged in price after issuing a much weaker than expected outlook for the current quarter, observes value investor John Buckingham in The Prudent Speculator.

Interestingly, Cisco Systems (CSCO) joined the majority of companies (68.0% of the S&P 500 (SPX)), according to the latest tally from Bloomberg) that have topped estimates when it announced fiscal Q1 non-GAAP EPS of $0.53, versus forecasts of $0.51.

Cisco's Q1 revenue of $12.1 billion did come in light of projections, with CEO John Chambers explaining, "While our revenue growth was below our expectation, our financials are strong, our strategy is strong, and our innovation engine is executing extremely well. We remain confident in our long-term goal to be the Number One IT company in the world."

Unfortunately, Mr. Chambers went on to say that revenue in fiscal Q2 would decline by 8% to 10%, due to weakness in demand in emerging markets like China (orders off 18%), Russia (orders down 30%), and Brazil (orders dropped 25%), as well as caution from businesses in the wake of the US government shutdown.

Meanwhile, the company announced a $15 billion addition to its stock repurchase authorization, hardly an insignificant figure for a company with current market capitalization of $115 billion.

While we have trimmed our Target Price for CSCO to $32, we remain buyers of the shares, as the stock now changes hands at 11.5 times earnings, 2.0 times book value and 2.4 times sales. Those are all fundamental valuation multiples that are well below the historical averages.

True, Cisco's growth potential isn't what it used to be, but the inexpensive price tag is supported by a superb balance sheet loaded with significant net cash and investments, not to mention a dividend yield of 3.2%.

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More from MoneyShow.com:

Google: Still a Buy at $1,000

Intel: A Buy Despite Headwinds

Big Blue is Still a Buy

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