Is Cisco an Outperform?

With shares of Cisco Systems (NASDAQ:CSCO) trading at around $20.80, is CSCO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Cisco-Logo_0Before we get to the news that you might already know – earnings numbers and guidance – let’s take a look at five fun and interesting facts about Cisco. One, the company was started nearly 40 years ago when a husband and wife working at Stanford University wanted to communicate via email. What makes this fact even more interesting is that when Cisco went public in 1990, one of them – Sandra Lerner – was fired. This immediately led to her husband, Leonard Bosack, quitting, which was probably what the company was banking on.

Two, the name Cisco comes from San Francisco. This is why the “C” in Cisco wasn’t capitalized in the early days. Three, John Chamber has been with the company since 1995. At that time, it was just a $1.2 billion company. Good job, Mr. Chambers! Four, Cisco has made more than 150 acquisitions. Five, the CR-3 routing system is capable of downloading the entire Library of Congress in less than two seconds, and it’s capable of streaming every motion picture ever made in less than four minutes. Impressive.

Obviously, those aren’t catalysts for the stock’s movement, but there is a good chance that you have been reading the same Cisco news over and over again. It’s nice to mix it up once in a while. Let’s get to the numbers that you might already know, as well as catalysts for the stock’s movement. Minus items, Q2 EPS came in at $0.51 versus an average expectation of $0.48. Q2 revenue was up 5 percent to $12.1 billion. The average expectation was $12.06 billion. For the current quarter, minus items, Cisco expects EPS of $0.48 to $0.50. Revenue is expected to come in between $12.05 billion and $12.28 billion.

As expected, revenue in the Americas and Asia was strong while Europe, the Middle East, and Africa weighed on results. Perhaps the most important news was a specific comment made by CEO John Chambers. He stated, “2013 is off to a slow start.” However, he also stated that business should pick up as the year goes on.   

Let’s take a look at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Cisco is normal. The balance sheet is excellent. Operating cash flow is also impressive at over $11.50 billion.   

Debt-To-Equity

Cash

Long-Term Debt

CSCO

0.31

$45.00 Billion

$16.33 Billion

JNPR

0.14

$2.85 Billion

$999.20 Million

ORCL

0.46

$33.70 Billion

$19.76 Billion

 

T = Technicals on the Stock Chart Are Mixed  

Cisco has underperformed the S&P 500 as well as Oracle Corporation (NASDAQ:ORCL) over the past three years. However, it has “outperformed” Juniper Networks (NYSE:JNPR) over that same time frame. Cisco currently yields 2.60 percent whereas Oracle only yields 0.70 percent and Juniper doesn’t offer any yield.

1 Month

Year-To-Date

1 Year

3 Year

CSCO

-1.24%

5.40%

5.61%

-9.48%

JNPR

2.69%

8.69%

-5.27%

-13.65%

ORCL

-0.26%

4.65%

24.92%

53.02%

 

At $20.80, Cisco is currently trading above all its averages.  

50-Day SMA

20.33

100-Day SMA

19.30

200-Day SMA

18.37

 

E = Earnings Have Been Inconsistent          

Earnings have been inconsistent through the years, but top-line growth has been solid since 2010.

2008

2009

2010

2011

2012

Revenue ($)in billions

39.54

36.12

40.04

43.22

46.06

Diluted EPS ($)

1.31

1.05

1.33

1.17

1.49

 

We already know what happened this quarter. Now let’s take a look at previous quarters as well.

10/2011

11/2012

4/2012

7/2012

10/2012

Revenue ($)in billions

11.26

11.53

11.59

11.69

11.88

Diluted EPS ($)

0.33

0.40

0.40

0.36

0.39

 

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

On the negative side, there has been slowing growth for core network routers and switches. The global recovery has also been softer than many had hoped for. On the positive side, Cisco is benefiting from strength in wireless.

Conclusion

Cisco is one of the best-run companies on the planet. Margins and cash flow are always strong, the balance sheet is always in great condition, top-line growth is consistent, and there is a ton of innovation as well the potential for added growth through acquisitions. Cisco’s stock hasn’t moved much over the past decade, but if you’re looking to invest in a great company opposed to a great stock, then this is a top-tier option. It usually works out that the stock eventually follows. However, there is no telling what can happen in today’s unpredictable economic environment. If the stock continues to remain in a range between $16 and $26 for the next ten years, then at least there is a dividend to collect.

Cisco is a long-term OUTPERFORM. That said, 2013 could be testy.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.