ModernGraham Valuation: Cisco Systems Inc. (CSCO)

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Company Profile (obtained from Google Finance): Cisco Systems, Inc. designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. Its products are installed at enterprise businesses, public institutions, telecommunications companies, commercial businesses, and personal residences. The Company has five segments: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. In October 2013, Cisco Systems Inc completed the acquisition of Sourcefire, Inc. In October 2013, the Company announced that it has completed the acquisition of privately held WHIPTAIL.

Defensive and Enterprising Investor Tests (explanation):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation):

MG Value $28
MG Opinion Fairly Valued
Value Based on 3% Growth $22
Value Based on 0% Growth $13
Market Implied Growth Rate 3.28%
Net Current Asset Value (NCAV) $4.35
PEmg 15.05
Current Ratio 2.95
PB Ratio 2.06

Key Data:

Balance Sheet – 7/27/2013 (an Introduction to the Balance Sheet)

Current Assets $65,521,000,000
Current Liabilities $22,192,000,000
Total Debt $12,928,000,000
Total Assets $101,191,000,000
Intangible Assets $25,322,000,000
Total Liabilities $42,071,000,000
Outstanding Shares 5,389,000,000

Earnings Per Share – Diluted

2013 $1.86
2012 $1.49
2011 $1.17
2010 $1.33
2009 $1.05
2008 $1.31
2007 $1.17
2006 $0.89
2005 $0.87
2004 $0.70
2003 $0.50
2002 $0.25

Earnings Per Share – Modern Graham

2013 $1.50
2012 $1.30
2011 $1.21
2010 $1.20
2009 $1.11
2008 $1.09

Conclusion:

Cisco is a very strong company when it comes to its financials.  Either a defensive investor or an enterprising investor should be very interested in doing further research in Cisco.  From a valuation standpoint, the earnings have shown steady growth over the last number of years, and the company seems to be fairly valued in the market place but is very close to being considered undervalued.  The market implies a growth of only 3.28%, but earnings have grown more than that in the historical period we’ve examined.

What do you think?  Is Cisco fairly valued by the market place or will it see a higher growth rate than what is implied?

Disclaimer:  The author did not hold a position in Cisco at the time of publication, and had no intention of purchasing a stake in the next 72 hours.

Photo Credit:  Andrew Magill


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4 responses to “ModernGraham Valuation: Cisco Systems Inc. (CSCO)”

  1. corpgovnet Avatar

    $CSCO Could be loosing fortune soon to open source SDN software http://finance.yahoo.com/news/heres-happened-cisco-lost-1-210030472.html … Analysis doesn’t account for black swans.

    1. Benjamin Clark Avatar

      Thanks for the comment!

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