Cisco Systems, Inc. (CSCO) Quarterly Valuation

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The tech industry can sometimes be difficult to analyze and compare to other industries, with the result often leading to speculation about where a company will go in the future.  One of the greatest lessons from Benjamin Graham is to avoid speculating by basing your analysis in factual data.  The tech industry is one of the areas where this lesson should be remembered most dearly.  Intelligent Investors seeking to follow Graham’s methods should use an analytical method that can be utilized across industries in order to allow the comparison of opportunities for profit.  The ModernGraham analysis is intended to compile information in order to compare an investment opportunity against another, and what follows is a specific look at how Cisco Systems, Inc. fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Cisco Systems, Inc. (Cisco) 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. Its products are installed at enterprise businesses, public institutions, telecommunications companies, commercial businesses, and personal residences. The Company operates in three segments: The Americas; Europe, Middle East, and Africa (EMEA), and Asia Pacific, Japan, and China (APJC). In July 2013, the Company announced that it has completed the acquisition of Composite Software, Inc. 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. In December 2013, Cisco Systems Inc completed the acquisition of privately held Insieme Networks.

CSCO Chart

CSCO data by YCharts

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

Key Data:

MG Value $31.26
MG Opinion Undervalued
Value Based on 3% Growth $23.62
Value Based on 0% Growth $13.84
Market Implied Growth Rate 2.46%
Net Current Asset Value (NCAV) $3.92
PEmg 13.43
Current Ratio 2.89
PB Ratio 1.99

Balance Sheet – 10/31/2013

Current Assets $62,796,000,000
Current Liabilities $21,728,000,000
Total Debt $12,947,000,000
Total Assets $100,741,000,000
Intangible Assets $27,639,000,000
Total Liabilities $41,844,000,000
Outstanding Shares 5,351,000,000

Earnings Per Share

2014 (estimate) $1.77
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
2002 $0.25

Earnings Per Share – ModernGraham 

2014 (estimate) $1.63
2013 $1.50
2012 $1.30
2011 $1.21
2010 $1.20
2009 $1.11

Dividend History

CSCO Dividend Chart

CSCO Dividend data by YCharts

Conclusion:

Cisco Systems, Inc. looks very good for both the Defensive Investor and the Enterprising Investor, and has even improved upon the state we found the company when it was last reviewed in November 2013.  The company passes all of the requirements of the Defensive Investor except for the dividend history, as the company only recently began paying a dividend.  In addition, all five of the requirements of the Enterprising Investor are satisfied.  As a result, value investors following the ModernGraham approach should feel comfortable proceeding with further research to determine whether Cisco is right for their individual portfolio.  One recommended research technique would be to compare Cisco to competitors such as by reviewing the ModernGraham valuation of Microsoft (MSFT) and the ModernGraham valuation of Hewlett-Packard Co. (HPQ).  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.11 in 2009 to an estimated $1.63 for 2013.  This level of growth is very solid, and outpaces the market’s implied growth rate of 2.46%.  The ModernGraham valuation model returns an intrinsic value that surpasses the market’s price, demonstrating that the company seems to be undervalued at the present time.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Cisco Systems, Inc. (CSCO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Cisco Systems, Inc. (CSCO) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.


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5 responses to “Cisco Systems, Inc. (CSCO) Quarterly Valuation”

  1. Maverick707 Avatar
    Maverick707

    I think that Cisco is a classic value trap and that it no longer has a defendable franchise. The technology is changing quickly and there are a lot of smaller Co. that offer similar products at much reduced prices (if not for free). It’s been atop of it’s industry for a while, but for most of the last decade it has stagnated and in that time lost a lot of ground. There is and will continue to be margin and profit pressures. Plus like a lot of large tech Co’s and large Co’s in general, it is a product of its own success. It is increasingly hard to move the needle at such a large enterprise. Acquisitions, divestures, increased dividends, and share buybacks might prop up the stock price for a while, but in the fast-pace hyper-competitiive technology hardware space such tricks (dare I say, gimmicks) can only last for so long.

    Yes, most of the financials are rosy, but the future technological competitive landscape for Cisco does not look bright. Even a CEO change, if there is one recently, will not change that. Sadly, I hate to admit, but the best days for Cisco are behind it. It will now follow a similar path as Sun Microsystems, Alcatel-Lucent, Dell, and HP. The death will be slow and it will be ignamanious. That is it’s destiny. You should have the foresight to see that. Stop just looking at the balance sheet and I/S and look at the industry.

    It’s protective armor and leading market-share is slowly being chipped away by hungry upstarts. A once-great technology Co. cannibalized by the ruthless competition it once thrived in. Shortly it will be a shell of it’s former self. This is not a Graham stock! Some of it’s numbers on paper might indicate that, but Graham or Buffet would be too smart to invest in this company. They would recognize that the world is changing rapidly, competitors are stealing market share, undercutting them, forcing margins down, and even offering their wares for free. Cisco no longer has the great moat or franchise that Buffett and Munger adore. Stay away if you can, for you if you don’t soon, it just might be too late.

    1. Benjamin Clark Avatar

      Maverick: All of the points you made are valid, but they are speculative in nature. One of the key things that Graham taught is to avoid speculation by basing your investment decisions in the factual data of the financial statements. For Cisco, those figures are solid. The company is suitable for Defensive Investors, and appears to be fairly valued.

      That said, there is a place for discussing the things you suggest, and that comes in when comparing solid Defensive Investor companies against one another. Do you have any suggestions of companies to look at in a comparison?

  2. samuel koegnig Avatar
    samuel koegnig

    mr. . clark you make some valid points as does the otheingr comment! Juniper is one competitor gaining and
    there are others too. The CEO Chambers has really taken very large stk options and many previous buybacks were offset by stk options given to mgt and employess with the net decrease in shares minimal. This is the result
    of an inept Board of Directors favorable to anything Chambers does. Cisco is asleep at what the competition is doing and nothing exciting or dynamic has been announced . This Board and mgt has done nothing for investors share value while enriching themselves. Time for all of them to be replaced . MG should also value mgt performance
    for 1 yr 3 yr and 5 yr performance.

    1. Benjamin Clark Avatar

      Thanks!

      Management performance and competitive analysis is the next part of the analysis, and is useful for deciding between two suitable and undervalued companies.

  3. William Avatar
    William

    Agree with Mr. Clark (hereinafter referred to as BC). The fundamentals of CSCO are hands down strong (with emphasis). The company is devoting the capital necessary for the long term (ie: cloud). Considering a pool of 10 private and public users (that I have personally inquired to on my time) over the last month who use CSCO products…they are reasonably content. Thus, based on BC’s charts, $23.08 was a good buy today for me even at 3% growth. Excellent job BC.

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