Thursday, February 19, 1998
Cisco Systems
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Phone: 408-526-4000
Website: http://www.cisco.com
Price (2/18/98): $65 1/2
HOW DID IT DOUBLE?
A double for Cisco Systems is certainly no big deal. This networking juggernaut
has been the single best performing stock of the 1990s. $10,000 plunked into
Cisco Systems in 1990 would be worth well over $1 million today. The stock
has risen over 12000% in that time. The #2 stock, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>, has risen a mere 4800% in the same period.
At this time last year, the networking stocks were rocked by 3Com's
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> proposed merger with U.S. Robotics and by the news that Intel
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> was going into the networking business with an aggressively
priced networking hub and a fast ethernet chip.
Investors dumped networking stocks and among the jetsam was Cisco Systems.
This dip to $30 a share provided a unique buying opportunity and created
another double for investors. Occasionally a stock falls because of problems
in its sector that don't relate directly to the company and that can create
an opportunity.
BUSINESS DESCRIPTION
Cisco is the leading supplier of products that link local area networks
(LANs) and wide area networks (WANs). Cisco is the undisputed leader in the
computer networking equipment business. It has 85% of the market for routers
and 35% of the market for LAN switches. Its other products include dial-up-access
servers and network-management software. It is rapidly moving into the
data/voice/video integration business.
In addition to internal growth, Cisco is growing through acquisitions. Most
recently it acquired Lightspeed. Cisco has developed strategic partnerships
with the industry's biggest players, including Microsoft, Hewlett-Packard,
and Intel, and with communications firms such as GTE, US West, and Alcatel.
Cisco is booking fully 41% of its orders at its Cisco Connection website
using its own networking technology. Pretty slick.
FINANCIAL FACTS
Income Statement
12-month sales: $7298 million
12-month income: $1614 million*
12-month EPS: $1.55*
Profit Margin: 22.1%
Market Cap: $69561 million
(*Pro forma, excluding non-recurring items)
Balance Sheet
Cash and investments: $1614 million
Current Assets: $3556.3 million
Current Liabilities: $1350 million
Long Term Debt: None
Ratios
Price-to-earnings: 42.3
Price-to-sales: 9.5
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Greg Markus, the manager of the
Boring Portfolio,
has been a long-time holder of Cisco. Last April when the stock hit the skids,
he was resolute in his opinion that the stock looked cheap and was undervalued.
He presented his argument in a
column
that nearly coincided with the low in the price.
The basic bullish argument for Cisco has been the growth of the networking
industry that is expected to be in the 30-50% range. Cisco is the industry
leader and has consistently stated that it intends to grow even faster than
the industry at large. There was no fundamental justification for the swoon
in Cisco's stock price last spring. An investor willing to look beyond the
fear of the moment in the networking industry could have picked up Cisco
on the cheap.
WHERE TO FROM HERE?
Cisco isn't cheap, and it hasn't been for some time. An investor has
to have the confidence that Cisco will continue to lead this rapidly expanding
industry.
In a recent Investor's Business Daily article, analyst Mike Rothman
of Meta Group was quoted as being concerned that Cisco had fallen behind
while others see Cisco as a leader in the move to data/voice/video integration.
The sheer size of Cisco makes it less agile in a rapidly changing technological
environment. However, the company is committing even more money to R&D,
and its cash hoard makes further acquisitions probable.
As far as valuation goes, Cisco is selling at 30 times its 1999 earnings
estimates, right in-line with growth rate estimates of 30%. Even though the
stock is selling at around 9 times sales, this is near the five-year lows
for that ratio. At 32 times cash flow, the stock is again at a five-year
low. Even at these "bargain" prices it is unlikely that many "value" investors
are lining up to buy the stock.
Cisco is a great stock to own, and it does have periodic dips in price that
create buying opportunities. A savvy Fool could use those dips to build a
position in this networking heavyweight.
-Mark Weaver, MD
([email protected])