Is It Time To Buy Cisco?
Last week, search engine giant, Google (GOOG) jumped 15% in one day.
About six weeks ago, I wrote a post stating that Google was undervalued by 33%, and worth buying at around $500 per share.
Since then it’s jumped to $600, a whopping 20% jump, more if managed to get in at the low point. Quite a strong move for a large cap stock.
I still think the story for Google is strong, but if I didn’t already own it, I wouldn’t necessarily buy it today. Instead, I’d look for another cheap stock, something a little more boring.
As I wrote about in a previous post on investing in boring stocks, I prefer unloved, boring stocks with no growth prospects over exciting, glamor stocks. Incidentally, the stock I mentioned in that post, Johnson & Johnson (JNJ), is up over 10% in the past four months.
One of the stocks I’d consider is Cisco (CSCO).
This tech giant has lost its luster, with the stock price having gone nowhere for the past ten years.
I blame the poor leadership of the CEO, John Chambers, for the stocks performance. But at today’s prices, it probably doesn’t matter how incompetent the management is.
Cisco currently trades for $15.66 with a newly introduced dividend yield of 1.50%. It trades for a P/E of 12.2 but more importantly it trades for a P/FCF of only 9.2.
FCF or free-cash-flow is one of my favorite metrics when valuing stocks. It’s the cash left over after all the expenses have been paid out, and capital expenditures have been made. Unlike earnings, free-cash-flow is very hard to manipulate. Over the past decade, even though Cisco’s share price has stagnanted, the free-cash-flow has more than doubled from $4.1 billion to $9.2 billion.
For a stable, profitable market leader like Cisco, ten times free-cash-flow is a great deal. As Warren Buffett indicated in his purchase of Lubrizol, it’s okay to pay 20 times free-cash-flow for a great company.
Cisco also has an incredibly strong balance sheet, with about $40 billion in cash or $7.80 per share in cash – that’s almost half of it’s stock value.
Even though Cisco faces increasing competition and has a penchant for wasting money on acquistions that don’t seem to make any sense, it still has a wide economic moat. Cisco makes devices that move internet traffic. And the amount of internet traffic is increasing every day.
It’s only a matter of time before Cisco becomes a $25 stock again.
Disclaimer: I’m long Cisco.
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July 20th, 2011 at 11:50 am
Great post. I wrote something on CSCO a few weeks ago and concluded exactly the opposite.
First, a small point – net cash is only about $5, which is still 33% of value.
There are some positive signs, including a restructuring of CSCO operations, selling one unit and laying off another 6500 workers, in an effort to reduce costs by $1bn per year, which, assuming revenue remains flat and margins are otherwise the same, would increase net income by 10%.
My problem with this stock is fundamentally John Chambers. He makes two big mistakes, and they have both cost investors lots of money.
First, he sees the tech world through extremely tinted glasses in which he believes that he can grow revenue by 15% forever, but the fact is that tech, even tech infrastructure, cannot grow to the moon (despite some interesting statistics from CSCO to sugget the contrary). While he has now admitted error, it is not clear to me that he really has reset his expectations (I think he thinks it is an execution issue, not a strategy issue). Moreover, I do not know if he can lead a company that has to focus on squeezing hte most out of a 6-8% growth rate. His record on acquisitons has been very mixed at best, and Chambers has allowed the company to lose focus and leadership in key segments.
Which leads to the second problem: Chambers is not shareholder friendly. He had to be dragged, kicking and screaming, into issuing a dividend.
After buying back billions of shares, the company still has nearly the same number of shares outstanding as it did 10 years ago. Billions of dollars spent to fight dilution. Not a great use of shareholders money. True the amounts issued now are lower, and it appears that options issuance has been suspended except where necessary to meet promised compensation for employees of acquired firms.
But he continues to issue gobs of stock – there are still 637 million options outstanding as of the latest 10Q, and the restricted stock gets issued in bulk. Worse, in the event that shares are forfeited, they are not simply cancelled, but are instead returned to the pool to be distributed to someone else.
Still, I must admit that the company could be worth $25-28 per share, were someone else at the helm. Maybe I should rethink my position.