Cisco Systems Inc. (CSCO) is one of the most recognizable and established companies in the Technology sector. With a market cap of nearly $200 billion, they are also one of the largest, if not THE largest player in the Networking & Communications segment. They are, without question, the standard that all other networking businesses are measured and compete against. No matter whether you’re talking about wired or wireless networking, CSCO is one of the companies that not only developed the standards and infrastructure the entire Internet is built on today, but that continues to lead the way into the future, including the next generation of technology in the so-called “Internet of Things” (IoT).
It’s ironic, perhaps that despite CSCO’s unquestioned dominance in its market, the stock has mostly languished for nearly two decades. After riding the “dot-com boom” of the late 1990’s to a peak at around $80 per share, the stock cratered when that boom went bust, dropping to as low as about $8 in late 2002. From that point it never rose higher than into the low $30 range – at least not until the latter part of 2017, when the stock finally broke that top-end resistance. That pushed the stock to a high in May a little above $46 per share as Tech stocks generally prospered.
Recently, however, it seems that CSCO fell victim to the latest “Amazon rumor mill” phenomenon that has afflicted companies like CVS Health Corp (CVS), The Kroger Company (KR), and others who watched their stock price slide amid rumors Amazon.com (AMZN) was looking for a way to expand its business into their respective industry. The latest rumor is that AMZN is considering branching their Web Services unit into network switching hardware – the same technology that CSCO has dominated for more than two decades.
Despite the fact AMZN has provided no validation of the rumor, and in fact has given to indication they were in fact considering the move, or actually developing any such products, the rumor has been sufficient to help drive the stock from that May high price to its current level a little below $42 per share. That might not sounds like much of a drop, but it does represent a 10% decline in the stock price – enough that some analysts have been recommending investors should “buy the dip.”
I’m not sure that I agree. While I recognize CSCO’s dominance in its industry, expect it to continue, and recognize the company’s core fundamental strength, my reliance on value analysis also forces me to look at the stock’s current price in more conservative terms. It looks very overvalued right now. The company is due for its latest earnings report later this month, and that report could alter my perspective somewhat; but as of now I have to believe the stock is at a greater risk of a steeper decline than it is of staging a rebound to test its recent highs. Here’s what I mean.
CSCO Current Price: $41.86
Cisco Systems, Inc. (CSCO) designs and sells a range of products, provides services and delivers integrated solutions to develop and connect networks around the world. The Company operates through three geographic segments: Americas; Europe, the Middle East and Africa (EMEA), and Asia Pacific, Japan and China (APJC). The Company groups its products and technologies into various categories, such as Switching; Next-Generation Network (NGN) Routing; Collaboration; Data Center; Wireless; Service Provider Video; Security, and Other Products. In addition to its product offerings, the Company provides a range of service offerings, including technical support services and advanced services. The Company delivers its technology and services to its customers as solutions for their priorities, including cloud, video, mobility, security, collaboration and analytics. The Company serves customers, including businesses of all sizes, public institutions, governments and service providers. CSCO has a market cap of $197 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 11%, while sales growth was more modest, at about 4%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize their business operations. In the most recent quarter, both metrics grew about 4%. Over the last twelve months, the company also reported negative Net Income of about $1.2 billion, raising questions about their operating costs and margins.
- Free Cash Flow: CSCO’s free cash flow over the last twelve months is more than $12 billion. This is a number that the company has historically managed to maintain at very healthy levels. It should be noted that the negative Net Income just mentioned appears to be a temporary phenomenon, and the company’s massive “war chest” of cash really makes it just a temporary blip on the radar.
- Debt to Equity: CSCO has a conservative, manageable debt-to-equity ratio of .44. I already alluded to the company’s large cash position; at more than $54.4 billion, it is also more than twice the total amount of long-term debt shown on their balance sheet. The company also recently announced the repatriation of approximately $67 billion of cash from overseas resulting from the passage of tax reform, with plans to use the money to fund a 14% dividend hike and a $25 billion increase its ongoing share repurchase program as a clear effort to return value to their shareholders.
- Dividend: CSCO currently pays an annual dividend of $1.32 per share, which translates to an annual yield of 3.15% at the stock’s current price.
- Value Analysis: CSCO’s Book Value is $9.69 per share, and this is where the biggest cracks in the bargain argument really exist. At the stock’s current price, its Price/Book ratio is more than twice as high as its historical average; a drop to par with that average puts the stock at risk of a decline of more than 43% from its current price. That would also put the stock at price levels it hasn’t seen since early 2016. Factor in the fact that the stock is in a clear downward trend since May and is pushing very near to a test of its long-term support at around $41. A drop below that price would mark a clear extension of the downward trend that could see it drop into the mid-$30 range in fairly short order.