Best of the Week
Most Popular
1.Ukraine Preface, the Emerging Dynamics Of Petro-Yuan Standard - Jim_Willie_CB
2. Speculations Reversed - Gold Price Stealth Rally 2014 - Peter_Schiff
3.Bubbleberg News Drivel Masquerading as Financial Reporting - David A. Stockman
4.Nationwide UK House Prices 9.5% Inflation, Housing Market on Steroids, Help to Buy Anniversary - Nadeem_Walayat
5.How to Profit from Palladium Huge Price Surge… - Peter Krauth
6.UK Home Solar Panel Installations Good or Bad for House Buying and Selling? - Nadeem_Walayat
7.Global Gold Manipulation Update - MAP Wave Analysis - Marc_Horn
8.Ukraine Capital Controls and 200% Inflation But Still In Better Shape Than US! - Jeff_Berwick
9.The Rise of a Euro-Chino-Russian Superpower - Stephan Bogner
10.Across Europe Secession Movements Intensify - BATR
Last 72 Hrs
10 Ways to Screw up Your Retirement - 17th Apr - 14
One of Harry Dent’s Three Keys to Market Prediction is Cycles - 17th Apr - 14
Obamacare Proof Stocks - 17th Apr - 14
Gold, Silver And The Mining Sector: Prepare For A Severe Fall - 17th Apr - 14
Hidden Australian Life Sciences Bio-tech Growth Stocks - 17th Apr - 14
Disrupting Big Data Status Quo - 17th Apr - 14
What the Stock Market Bears Have Been Waiting for... - 17th Apr - 14
Copper Is Pathological and Suffers from SAD, but It Has Value - 17th Apr - 14
Old World Order New World Order, Chaos And Change - 17th Apr - 14
Even The US Government Will Abandon the U.S. Dollar - 17th Apr - 14
Gold - Coming Super Bubble - 17th Apr - 14
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14
Bitcoin Price Strong Appreciation to Be Followed by Declines? - 14th Apr 14
Greece, Turkey, We're Shuffling The Cards on Our Europe Investing Play - 14th Apr 14
Silver Price Ultimate Rally: When Paper Assets Collapse - 14th Apr 14
Get Your Share of an Extra Trillion Euros Money Printing - 14th Apr 14
Fourth Reversals in The Gold and Silver Charts - 14th Apr 14
Stock Market Nearing Rally in a Downtrend - 14th Apr 14
London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - 14th Apr 14
Four Horsemen - Top Economists Explain the Source of Our Economic Crisis - Video - 13th Apr 14
Peak Oil And Global Warming – A Question Of Culture - 13th Apr 14
The Global Banking Game Is Rigged, and the FDIC Is Suing - 13th Apr 14
College Degree Earnings Propaganda - 13th Apr 14 - Andrew Syrios
Stock Market Potential Diagonal Triangle Pattern Forming - 12th Apr 14
Ukraine Crisis – Military Flash Drive Thinking - 12th Apr 14
Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - 12th Apr 14
Gold Preparing to Launch as U.S. Dollar Drops to Key Support - 12th Apr 14
Manipulated Stocks Markets And The Empty Bag - 12th Apr 14
Stock Market - It’s Not Time to Panic… It’s Time to Buy - 12th Apr 14
Doctor Doom on the Fiat Money Empire Coming Financial Crisis - 12th Apr 14
Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - 11th Apr 14
This Bitcoin Price Rally Might Be a Fake One - 11th Apr 14
GDX Gold Stocks Benchmark - 11th Apr 14
Silver Price Finally Outperforms – How Bullish Is That? - 11th Apr 14
Limits to Employment Participation, and Societal Change - 11th Apr 14
US Moves To Restrict Travelers Taking International Flights - 11th Apr 14
Bill Gross to El-Erian: 'Come on, Mohamed, Tell Us Why' You Resigned PIMCO - 11th Apr 14
British Pound GBP/USD - Double Top or Further Rally? - 11th Apr 14
Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - 11th Apr 14
Russia Invaded Crimea and These US Energy Companies Made a Killing - 11th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Cisco Represents Rare Investor Opportunity of an Undervalued Dividend Growth

Companies / Tech Stocks Nov 14, 2012 - 12:55 PM GMT

By: Charles_Carnevale

Companies

Best Financial Markets Analysis ArticleWe don’t believe that anyone will argue against, or should argue against, the idea that the Internet will continue to grow for many years to come.  Cisco Systems (CSCO) is the world’s largest supplier of high performance Internet networking systems and solutions.  According to research from Standard & Poor’s Corp., Cisco’s product families are comprised of four segments.  Switches represent 32% of fiscal product sales, routers represent 18%, new products (the biggest segment) representing 48%, and the final category is other representing 2% of fiscal sales.


Cisco reported earnings yesterday and the market seems pleased with what it saw. Earnings, and revenues were both better than forecast (click this link to earnings report supporting slides).  We felt that the following quote from CEO John Chambers during their conference call nicely summarized the opportunity in front of Cisco, and frankly, its many competitors:

“In a world of many clouds mobility, bring your own device, and the internet literally connecting everything. The network has never played a more central role, connecting people, the process, data and things, anywhere, anytime, across any device. In this cloud of mobile world, the challenges of scale, agility, security and resilience can only be addressed by an intelligent network, and Cisco is uniquely positioned to help our customers meet business requirements and drive this new growth.”

However, regardless of their good quarter, and the well-defined long-term opportunity in front of them, we believe that Cisco is a very undervalued blue-chip technology stalwart.  Furthermore, we believe that there are many reasons that this is the case, but we also believe that none of the reasons are supported by the company’s historically low valuation.  In other words, we are suggesting that Cisco’s fundamentals warrant a much higher valuation than they are currently receiving.

The following historical earnings and price correlated F.A.S.T. Graphs tell several interesting stories about this technology bellwether, and perhaps more importantly, the almost bizarre investor psychology that has been applied over the last decade and a half or so. From 1999 until the great recession, investors were willing to price this company at a premium valuation to its earnings justified levels (the orange line on the graph). However, since the fall of 2008, the market has begun valuing Cisco at more realistic earnings justified levels (the price aligned itself with the orange line). However, we believe the pendulum has now swung too far.

To put this into a clear perspective, we can see by looking at the bottom of the graph that Cisco’s earnings continued to grow at above-average rates, indicating that Cisco’s business has not really changed that much.  However, by looking at how the market had overpriced Cisco shares for so many years, it becomes readily apparent that what has changed has been investor attitudes towards the company and its perceived value.

The following fiscal year-end PE ratios that were applied to the company during various fiscal year-ends tells the story.  At fiscal year-end July 31, 2000, Cisco’s PE ratio was 142, by fiscal year 2002 the PE ratio had fallen to 49, by 2004 Cisco’s PE was 29, by 2006 it was 20, by 2008 Cisco’s PE ratio was 17 and by fiscal year-end 2011 the PE had fallen to just above 12.  Currently, Cisco’s blended PE ratio hovers around 10.  This seems like an awful low valuation for a company that has grown earnings growth of 12.7% per annum.

Cisco’s valuation story becomes even more confusing when you evaluate the company over its more recent history.  Since calendar year 2010, the following earnings and price correlating graph shows that Cisco’s stock price has steadily fallen, in spite of the fact that their earnings growth post recession has actually accelerated to 14.7% per annum.  Moreover, Cisco has sweetened the pot by initiating a dividend that has grown very rapidly since it was first started.

Follow this link for a FAST Graphs™ video analysis of Cisco Systems Inc.

Summary and Conclusions

As this article is being written, Cisco shares are trading up over 6%, so perhaps the market is beginning to recognize the value in this blue-chip technology bellwether.  However, even after a 6% increase, we believe that Cisco remains a very undervalued blue-chip technology stalwart.  Longer-term, we are confident that the company will continue to deliver above-average earnings growth and with approximately $49 billion in cash, the company’s financial profile is impeccable. Consequently, we expect to see a continuing dividend increase in the future.

We believe there are many drivers fueling the opportunity for Cisco’s continued growth going forward. These include more sophisticated utilization of the Internet requiring capacity that Cisco is well positioned to supply.  Although Cisco is facing more competition as many startups are bringing innovative new offerings to the market place, Cisco’s management appears to be on top of the situation.  Consequently, we share the view that Cisco’s new product segment will be the primary driver of future growth. Furthermore, we believe there is no other company in the industry that possesses the size and scale that Cisco does to continue to serve its ever expanding market.

Consequently, we believe that Cisco represents an excellent opportunity for investors seeking a high-quality stock with above-average growth potential and an above-average and growing dividend yield. We see Cisco shares as undervalued relative to their current fundamentals, an even more importantly, relative to their well-defined continued long-term growth potential.  Therefore, we believe that the opportunity to find such a high-quality company trading at such a low valuation as Cisco currently is represents a rare opportunity that should not be overlooked.

Disclosure:  Long CSCO at the time of writing.

By Chuck Carnevale

http://www.fastgraphs.com/

Charles (Chuck) C. Carnevale is the creator of F.A.S.T. Graphs™. Chuck is also co-founder of an investment management firm.  He has been working in the securities industry since 1970: he has been a partner with a private NYSE member firm, the President of a NASD firm, Vice President and Regional Marketing Director for a major AMEX listed company, and an Associate Vice President and Investment Consulting Services Coordinator for a major NYSE member firm.

Prior to forming his own investment firm, he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck is a sought-after public speaker who is very passionate about spreading the critical message of prudence in money management. Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.

© 2012 Copyright Charles (Chuck) C. Carnevale - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014