Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the Defensive Investor with High Dividend Yields.Â Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Cisco Systems Inc. (CSCO)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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. 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 operates in three segments: The Americas; Europe, Middle East, and Africa (EMEA), and Asia Pacific, Japan, and China (APJC). In July 2014, the Company acquired privately held Tail-f Systems.
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 -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$23.91|
|Value Based on 0% Growth||$14.01|
|Market Implied Growth Rate||3.40%|
|Net Current Asset Value (NCAV)||$3.56|
Balance Sheet – 4/26/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Cisco Systems qualifies for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor’s only issue is with the short dividend history, while the Enterprising Investor has no initial concerns with the company. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of Microsoft (MSFT).Â From a valuation side of things,Â the company appears to be fairlyÂ valued after growing its EPSmg (normalized earnings) from $1.20 in 2010 to an estimated $1.65 for 2014. Â This level of demonstrated growth supportsÂ the market’s implied estimate of 3.40%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of Cisco Systems (CSCO)Â for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Cisco Systems (CSCO)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Cisco Systems (CSCO)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.