Cisco was in the right business the right time since went public on 16 February 1990, its stock was rising from a few dollars up to more than $600.
In March 2000, Cisco was the most valuable company in the world, with a market cap of over $500 billion and the highest price $82 per share (adjusted for stock splits).
In 2002, the stock hit the lowest price $8.12.
Is CISCO the right company to dominate the Internet technology market?
What set Cisco apart from other companies is the ability to deliver innovative products along with strong fundamental data and I would say this company has a margin of safety as the current price is $29.91 per share and discounted cash flow analysis shows $35.61 target price.
Does this company have a solid competitive position on the market or is it worth to invest now?
Well, let’s go through all the facts to build up our inside and out investment view.
The research is based on annual reports but quarterly numbers can be used to double check Company’s competitiveness to profit from the “Internet of Everything”.
GICS sector: Information Technology
Business: Cisco designs, manufactures and sells networking products and services.
Area: Company’s business is organized into the following three geographical segments:
• Europe, Middle East, and Africa (EMEA)
• Asia Pacific, Japan, and China (APJC)
Headquarter: Incorporated in California in December 1984 with headquarters in San Jose, California.
Products grouped into the following categories:
• Next-Generation Network (NGN) Routing interconnects public and private wire line and mobile networks for mobile, data, voice, and video applications.
• Digital video distribution systems and digital interactive set-top boxes enable service providers to deliver entertainment, information, and communication services.
• Collaboration integrates voice, video, data, and mobile applications on fixed and mobile networks across a wide range of devices and related IT equipment such as mobile phones, tablets, and desktop and laptop computers.
• Data Center product category has been fastest growing major product category for each of the past four fiscal years.
• Security and Other Products
Trademark and patents: Cisco holds more than 2,500 issued U.S. patents, with active applications for more than 4,000 others.
Employees: 74 042 (as of 26.07.2014)
Stock Price: $29.91
Market Cap: $152 682 000 000
Enterprise Value: $120 197 000 000
The market Cisco operates on is characterized by rapid change, converging technologies and a migration to networking and communications solutions that offer relative advantages. Recent news about security threats doing serious damage to the competitiveness of international information technology companies.
Switching products and NGN: HP, Dell, Brocade, Juniper, Huawai, Netgear, Lenovo, ZTE
Data Servers: HP, IBM
Collaboration and digital video: Avaya, Microsoft, HP, Polycom, Motorola
Cisco is actually looking pretty good on its own.
Growth: Looking at Revenue, Operating Income, Net income and EPS we see steady uptrend during the past 10 years. Revenue and Free Cash Flow growth have been volatile but with a solid growth as well.
Gross, operating and net margins, ROE and ROA are little volatile, we see decline in some years but I rather say they are solid and strong than normal.
Financial Health: a financial leverage ratio of 1.82 is fairly conservative, there is enough cash to increase the dividend going forward or shares repurchase program:
• Cisco has consistently grown its dividend for four recent years which is a very good point for investment.
• The company is buying back its shares every year and returning some cash to its shareholders through buybacks. Check basic shares out in the Table1.
• Long term debt growth. Net cash by operating activities and free cash flows are extremely strong and it looks like Long-term debt will not be an issue     for Cisco.
• Security issues, China blacklisted US technology companies.
• Competitors. In its early days, Cisco had little direct or indirect competition, but eventually plenty of such giants like HP, IBM, Huawai, ZTE, Juniper,
Alcatel-Lucent and others.
Now we calculate the reasonable price of the stock by using discounted cash flow, DCF, approach. It’s always hard to estimate a potential growth of company but I assume it would be fairly enough to take 1.03 as a perpetuity growth of Cisco. This may seem very conservative number as well as discounted factor of 1.1 but at least we will ensure there is a safety margin in our valuation.
As shown below, by forecasting free cash flow and calculating total equity value we get the stock price at the level of $35.61, approximately +20% to the current price of $29.91.
For those who would like to play with valuation, I built the table below to show how the stock price changes if we change discount factors and perpetuity growth.
Is it worth to time the Market or to buy it now? I will strongly recommend putting this stock to your own Watch/Buy List now as long as it stays below the $35 level. With a strong competitive edge in the IT space, the company looks very well positioned to gain from global IT infrastructure.