Join        Login             Stock Quote

Do You Know The Way To San Jose? Buy Cisco (CSCO)

 May 17, 2012 11:26 AM

(By Kevin Donovan) The information technology world has beaten a well-worn path to San Jose, Calif., and the door of Cisco Systems Inc. (CSCO), long the bell cow of enterprise tech gear and a darling of tech investors.  It's still far and away the leader, but can it reclaim its investment allure? 

Though Cisco beat fiscal third quarter earnings and revenue estimates, its shares tumbled, dogged by management's cautionary tales of weakness in Europe and guidance that was less than enthusiastic.


At $16.67 per share, Cisco is down 17.5% in the last month after having hit a 52-week high in April of $21.30.  We believe the punishment is overdone.  On a trailing 12-months' basis, its price to earnings multiple is 12.3 vs. the S&P 500 multiple of 15.5.  On a forward basis, CSCO's discount to the market is even steeper at 8.7 vs. 12.9.  Applying a market multiple to the First Call fiscal 2013 consensus earnings estimate of $1.92, we derive a price target of $25.  We think this is achievable if the macroeconomic pie continues to grow, admittedly a big if.

[Related -Colgate-Palmolive (CL) Dividend Stock Analysis]


As an investment, here's where Cisco could run into a wall.  The industry leader already has a 75% share of the enterprise routing market and a 67% share in Ethernet switching.  Growth will be difficult if the world economy, led on its not so merry way by Europe this time, swerves into a ditch.  Our view, however, is that the U.S. and China will be strong enough horses to keep the wagon moving forward.

[Related -Citrix Systems, Inc. (NASDAQ:CTXS): A Look At Opportunities And Threats]


Cisco designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry and provides services associated with these products, most conspicuously routers and switches.  Routing technology is fundamental to the Internet, and this technology interconnects public and private IP networks for mobile, data, voice, and video applications.


Gartner Inc., the information technology research outfit, estimates 2012 global IT spending growth at 2.5% in current U.S. dollars, down from its previous forecast of 3.7%. However, stripping out the effect of exchange rate fluctuations, which Gartner considers the more meaningful metric, global IT spending growth in 2012 is forecast at 5.2%, up from a previous forecast of 4.6%.

A key area for growth could be telecommunications networking.  More smart phones mean more demand for data speed.  Gartner forecasts constant dollar growth in telecom equipment spending of 10.3% in 2012, up from its previous forecast of 8.1%.  This should play to Cisco's strength in this sector with products such as the super-fast CRS-3 carrier routing system. 


Competition is vigorous in the internet routing space.  Cisco's rivals include not only domestic firms such as F5, Juniper Networks and Riverbed Technology, but also China's Huawei.  These firms and others have put pressure on pricing.

Also, global economic growth is far from assured.  A double-dip recession in Europe, a hard landing in China and a U.S. fiscal crunch if sequestration kicks in next year could all hurt IT budgets.  Any damage will be limited, though, by easy monetary policy at the world's central banks, in our view

In sum, we think the Cisco haircut has been too severe and would be buyers at current levels.


iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageGermany Is On The Rebound - Time To Buy?

Based on this year's 17% spike in the Stoxx Europe 600 Index, it seems investors have found a home in read on...

article imageIs Drought Risk In The American West An Economic Threat?

The historic and ongoing drought in California is getting harder to ignore in terms of its potential impact read on...

article imageFunds Behaving Badly

Discipline is still the key to read on...

article imageGenuine Parts Co. (GPC): This Company's Raised Dividends For 59 Years

There are 253 million cars and trucks driving along U.S. roads. And the average age of those automobiles is read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.