Software Stocks

Cisco Systems Inc Valuation – February 2016 $CSCO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – February 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Cisco Systems Inc (CSCO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Cisco System, Inc. (Cisco) designs and sells lines of products, provides services and delivers integrated solutions to develop and connect networks around the world, building the Internet. The Company is engaged in designing, manufacturing and selling Internet Protocol (IP)-based networking and other products related to the communications and information technology (IT) industry, and provides services associated with these products and their use. The Company operates its business through three segments: The Americas; Europe, Middle East, and Africa (EMEA), and Asia Pacific, Japan, and China (APJC). It groups its products and technologies into the various categories, such as Switching, Next-Generation Network (NGN) Routing, Collaboration, Service Provider Video, Data Center, Wireless, Security, and Other Products. In addition to its product offerings, it provides a range of service offerings, including technical support services and advanced services.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of CSCO

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $117,257,399,996 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.35 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 49.01% Pass
6. Moderate PEmg Ratio PEmg < 20 13.19 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.01 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.35 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.42 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

CSCO value chart February 2016

EPSmg $1.79
MG Growth Estimate 5.57%
MG Value $35.06
Opinion Undervalued
MG Value based on 3% Growth $25.89
MG Value based on 0% Growth $15.18
Market Implied Growth Rate 2.34%
Current Price $23.54
% of Intrinsic Value 67.15%

Cisco Systems Inc qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  The Defensive Investor is only initially concerned by the short dividend record while the Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.30 in 2012 to an estimated $1.79 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.34% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Stage 3: Information for Further Research

CSCO charts February 2016

Net Current Asset Value (NCAV) $4.33
Graham Number $23.16
PEmg 13.19
Current Ratio 3.35
PB Ratio 2.01
Dividend Yield 3.48%
Number of Consecutive Years of Dividend Growth 6

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Oct2015
Total Current Assets $73,946,000,000
Total Current Liabilities $22,100,000,000
Long-Term Debt $21,594,000,000
Total Assets $111,773,000,000
Intangible Assets $27,174,000,000
Total Liabilities $51,796,000,000
Shares Outstanding (Diluted Average) 5,113,000,000

Earnings Per Share History

Next Fiscal Year Estimate $2.02
Jul2015 $1.75
Jul2014 $1.49
Jul2013 $1.86
Jul2012 $1.49
Jul2011 $1.17
Jul2010 $1.33
Jul2009 $1.05
Jul2008 $1.31
Jul2007 $1.17
Jul2006 $0.89
Jul2005 $0.87
Jul2004 $0.62
Jul2003 $0.50
Jul2002 $0.25
Jul2001 -$0.14
Jul2000 $0.36
Jul1999 $0.29
Jul1998 $0.20
Jul1997 $0.17
Jul1996 $0.16

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.79
Jul2015 $1.63
Jul2014 $1.54
Jul2013 $1.50
Jul2012 $1.30
Jul2011 $1.21
Jul2010 $1.20
Jul2009 $1.11
Jul2008 $1.08
Jul2007 $0.92
Jul2006 $0.74
Jul2005 $0.58
Jul2004 $0.40
Jul2003 $0.27
Jul2002 $0.17
Jul2001 $0.15
Jul2000 $0.27

Recommended Reading:

Other ModernGraham posts about the company

10 Undervalued Companies for the Defensive Dividend Stock Investor – February 2016
Cisco Systems Inc. Valuation – November 2015 Update $CSCO
The Best Companies of the Software Industry – August 2015
The 8 Best Stocks For Value Investors This Week – 8/8/15
Cisco Systems Inc. Analysis – August 2015 Update $CSCO

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Cisco Systems Inc. Valuation – November 2015 Update $CSCO
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Intuit Inc. Analysis – October 2015 Update $INTU
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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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