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 5 Low PEmg Companies for the Enterprising Investor. 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 specific look at how Cisco Systems Inc. (CSCO) 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.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$23.62|
|Value Based on 0% Growth||$13.84|
|Market Implied Growth Rate||2.84%|
|Net Current Asset Value (NCAV)||$3.43|
Balance Sheet – 1/25/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Cisco Systems Inc. is a great company for both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the short dividend history while the company passes all of the requirements of the Enterprising Investor. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Microsoft (MSFT) and Hewlett-Packard (HPQ). From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.20 in 2010 to an estimated $1.63 for 2014. This demonstrated level of growth surpasses the market’s implied estimate of only 2.84% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.
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.
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Disclaimer: The author did not hold a long position in Cisco Systems Inc. (CSCO) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.