Despite its Gains, Cisco is Still Undervalued
Cisco Systems (NASDAQ: CSCO), the world’s largest supplier of data networking software and equipment, has been in the news for all the right reasons over the past month. On the heels of a better than expected fourth quarter earnings report, in which the company reported an adjusted EPS ($0.47) above the Street’s expectations ($0.45), the stock has risen more than 10% in two weeks. In addition to sporting impressive year-over-year revenue (4.4%) and earnings (56.0%) growth, Cisco also boosted its dividend by a whopping 75%. With this increase, shares of CSCO now sport a projected dividend yield of 2.9%, and CEO John Chambers has vowed to devote half of the company’s future free cash flows to further payment hikes and share repurchases. Similar to this tech company, Cisco looks like a pretty good play at the moment.
Now, this improved yield is still below Hewlett-Packard (NYSE: HPQ) at 3.0%, but certainly a step above the likes of Juniper Networks (NYSE: JNPR), F5 Networks (NASDAQ: FFIV), and Riverbed Technology (NASDAQ: RVBD), all of which do not pay a dividend. With over $10 billion in free cash currently on its books, Cisco’s future looks bright, though it appears that investors have yet to take full notice. The stock currently trades at a Price-to-Cash Flow ratio (9.3X) below the communication equipment industry’s average (11.9X), JNPR (12.8X), FFIV (16.9X), and RVBD (17.3X). More importantly, Cisco’s cash hoard is also trading below its own 5-year (12.2X) and 10-year (16.2X) historical averages.
From an earnings standpoint, this undervaluation is slightly more pronounced, as shares of CSCO are currently trading at a Price-to-Earnings ratio of 14.2X, far below the industry average (24.1X) and competitors like JNPR (37.3X), FFIV (28.7X), and RVBD (52.9X). Interestingly, HPQ (6.8X) sports a lower earnings multiple, but it is trading at a higher PEG ratio (1.6) than CSCO (1.2). Moreover, the company’s bottom line is undervalued in comparison to its own 5-year (17.7X) and 10-year (24.4X) historical norms. In fact, Cisco’s earnings have traditionally traded at a 44% premium to those of the S&P 500 over the past decade. This year, they are much cheaper, trading at a 3% discount.
As mentioned above, Cisco finished its most recent quarter with better than expected EPS growth. Interestingly, the Street is forecasting the company to expand its bottom line by an average annual rate of 8.9% over the next five years, nearly double the growth rate (4.9%) it has achieved over the past half-decade. Moreover, it appears that this expansion is accelerating in the intermediate term, as analysts are estimating 5.1% growth in 2013 and 9.8% growth in 2014. If these estimates hold, Cisco will sport a ’14 EPS in the neighborhood of $1.90; nearly double the company’s 2009 total. Assuming that valuation metrics return to their historical levels, fairly valued shares of CSCO can eclipse $33 in the next 18 to 24 months; they currently trade in the $19 range. Heck, even if the stock simply maintains its current valuation, it should flirt with $27 a share, making a 40% appreciation over the next two years a solid floor.
From a macroeconomic perspective, there are promising headwinds in the mobile data market, in which Cisco hold a dominant market share in nearly every area including mobile IP infrastructure, backbone, edge, and backhaul. Over the next five years, mobile data traffic is expected to grow by more than 80% per annum, reaching 10 billion data-using devices by 2016. While projections remain rather fluid, the company is currently stating that this demand-driven expansion will improve revenues by $20 billion a year by the middle of this decade.
To recap: Cisco is coming off an extremely impressive earnings release, and is expecting solid EPS growth over the next few years. The stock is currently trading at cheap valuation metrics nearly every way you slice it, and a strong presence in the mobile arena gives investors plenty of reasons to be even more bullish. WealthLift’s Sentiment Index rates CSCO as a strong buy, with 95.45% of the community’s users placing an “overperform” rating on the stock. For more trading ideas in today’s uncertain market environment, visit WealthLift’s INSIDER blog.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.