Tuesday March 20, 2012
by Richard Moroney, editor Dow Theory Forecasts
Cisco Systems (CSCO) pushed the reset button in the fiscal year that began in August; the networking giant has sharpened its focus on cost cuts and efﬁciency improvements in hopes of reinvigorating its business.
Over the last few years, competitors have nibbled away at Cisco’s markets, slowing the company’s growth. But it is now emphasizing new products that will keep it relevant. In the last 12 months, Cisco invested more than $5.6 billion in R&D. And it is making acquisitions again.
In the January quarter, operating proﬁt margins widened to 23.7% from 16.2%, reversing a ﬁve-quarter trend of year-over-year declines. In the six months ended January, Cisco earned $0.90 per share, up nearly 13%.
Yet the shares trade at just 12 times trailing earnings, a discount of more than 30% to both Cisco’s computer-networking peers and its three-year average P/E.
Cisco also trades at a discount of at least 15% to its three- and ﬁve- year average price/sales, price/book, and price/cash ﬂow ratios.
Cisco sees the future in intelligent networks that allow computers to effortlessly communicate with each other and deploy processing power where it is needed most. Mobile data trafﬁc doubled last year, and Cisco expects trafﬁc to top 130 billion gigabytes in 2016, up from about 7 billion in 2011.
Cisco’s research efforts focus on two areas key to both traditional business networks and mobile devices: virtualization and the cloud.
Virtualization aggregates computing resources into a seamless network, allowing users to transfer data and use software applications anywhere from a handheld device to the central server.
The cloud is an Internet delivery system that pools network resources, reducing congestion when multiple users try to use ﬁles and programs stored on a single computer.
The consensus projects fairly modest per-share-proﬁt growth of 13% in ﬁscal 2012 and 8% in ﬁscal 2013, though the targets are on the rise.
Partly because of the company’s commitment to stock buybacks (share count has declined 8% over the last three years) and dividends (initiated in early 2011 and raised 33% last month), we rate the stock a Long-Term Buy.
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