Cisco Bounces Back Strong

3/19/2012


  Recent Price
$20
  Dividend
$0.32
  Yield
1.6%
  P/E Ratio
12
  Shares (millions)
5,401
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$20.49 - $13.30

Cisco Systems ($20; CSCO) pushed the reset button in the fiscal year that began in August. Over the last three fiscal years, operating profits declined at an annualized rate of 3%, while annual operating profit margins narrowed to 17.8% from 23.8%. The networking giant has sharpened its focus on cost cuts and efficiency improvements in hopes of reinvigorating its business.

In the January quarter, operating profit margins widened to 23.7% from 16.2%, reversing a five-quarter trend of year-over-year declines. In the six months ended January, Cisco earned $0.90 per share, up nearly 13%.

Yet the shares trade at just 12 times trailing earnings, a discount of more than 30% to both Cisco's computer-networking peers and its three-year average P/E. Cisco also trades at a discount of at least 15% to its three- and five-year average price/sales, price/book, and price/cash flow ratios.

Partly because of the company's commitment to stock buybacks (share count has declined 8% over the last three years) and dividends (initiated in early 2011 and raised 33% last month), the Forecasts rates the stock a Buy and a Long-Term Buy.

What is networking?

Cisco focuses on computer networking. Its two most important products are switches (32% of revenue in the six months ended January) and routers (18%). Switches connect devices to other devices, while routers connect devices to the Internet. About 21% of revenue came from services, mostly tech support and consulting. Cisco also sells television set-top boxes and wireless-connectivity products.

Over the last few years, competitors have nibbled away at Cisco's markets, slowing the company's growth. Cisco is emphasizing new products that will keep it relevant. In the last 12 months, Cisco invested more than $5.6 billion in research and development — only Microsoft ($33; MSFT), Intel ($27; INTC), and IBM ($204; IBM) spent more. The company also plans to start acquiring again, beginning with a $271 million deal for Lightwire, a maker of optical networking equipment, to close by the end of April.

Cisco sees the future in intelligent networks that allow computers to effortlessly communicate with each other and deploy processing power where it is needed most. Mobile data traffic doubled last year, and Cisco expects traffic to top 130 billion gigabytes in 2016, up from about 7 billion in 2011. Cisco's research efforts focus on two areas key to both traditional business networks and mobile devices: virtualization and the cloud.

Virtualization aggregates computing resources into a seamless network, allowing users to transfer data and use software applications anywhere from a handheld device to the central server. The cloud is an Internet delivery system that pools network resources, reducing congestion when multiple users try to use files and programs stored on a single computer.

Conclusion

The consensus projects fairly modest per-share-profit growth of 13% in fiscal 2012 and 8% in fiscal 2013, though the targets are on the rise. An annual report for Cisco Systems Inc. is available at 170 W. Tasman Drive, San Jose, CA 95134, (408) 526-4000; www.cisco.com.

CISCO SYSTEMS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jan '12
0.47
vs.
0.37
+ 11%
20.07
-
17.22
12 - 11
Oct '11
0.43
vs.
0.42
+ 5%
18.60
-
13.30
12 - 8
Jul '11
0.40
vs.
0.43
+ 3%
17.99
-
14.78
11 - 9
Apr '11
0.42
vs.
0.42
+ 5%
22.34
-
16.52
14 - 10
           
Year
(Jul.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
43.22
1.61
0.12
24.87
-
14.78
15 - 9
2010
40.04
1.63
0.00
27.74
-
20.68
17 - 13
2009
36.12
1.03
0.00
25.25
-
13.61
25 - 13
2008
39.54
1.31
0.00
34.24
-
20.56
26 - 16
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
87
85
68
73
96
65

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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