What Do Employees Think About Cisco?

With shares of Cisco Systems (NASDAQ:CSCO) trading at around $24.48, 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

Due diligence can lead to a lot of valuable information, especially for experienced researchers. However, potential investors often overlook one very important component, which is what employees think about their employer. Of course, those on the inside are going to offer valuable information.

According to Glassdoor.com, employees rate their employer a 3.5 out of 5, and 77 percent of employees would recommend the company to a friend. A relatively impressive 77 percent of employees approve of CEO John Chambers. These numbers are important, but let’s delve a little deeper. Please keep in mind that the following information is a summarization of various (and anonymous) employee comments.

Cisco employees tend to agree on many points. One is overexpansion in China and India. Two is aiming for cheaper employees opposed to those who can work faster or better. Three is too many reorganizations, which leaves less time for execution on existing programs. Four is a top-heavy management structure that leads to internal politics taking a precedence over customer needs and defeating competition. Five is too much bureaucracy, which has limited the company’s full potential. The last two points are normal for a large company. The former three points are potential negatives. On the positive side, employees enjoy the superior technology and organization.

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One employee mentioned a lack of risk-taking, but this comment doesn’t seem justifiable. Cisco has made the following acquisitions in 2013: Joulex (software), Ubiquisys (mobile), SolveDirect (cloud services), Cognitive Security (Network Security), and Intucell (SP Networking). This is in addition to 11 acquisitions in 2012, six acquisitions in 2011, and five acquisitions in 2010. If anything, Cisco has increased its risk taking.

All these acquisitions have the potential to lead to increased growth down the road. Cisco can certainly afford these acquisitions with its stellar balance sheet. This factor alone makes it an ever-present enormous threat in the industry. Furthermore, Cisco has been wise to diversify its acquisitions. By taking this approach, it has the potential to be a leader in several different areas.

On a fundamental basis, the stock looks good. Cisco is trading at 14 times earnings and 12 times forward earnings whereas Juniper Networks (NYSE:JNPR) is trading at 38 times earnings and 15 times forward earnings. Cisco has a profit margin of 20.11 percent whereas Juniper has a profit margin of 5.95 percent. And Cisco yields 2.80 percent whereas Juniper doesn’t offer any yield. As far as Alcatel-Lucent (NYSE:ALU) is concerned, it’s not in the same ballpark. Profit margins, ROE, and cash flow are all in negative territory, and it has a debt-to-equity ratio of 2.28.

Getting back to Cisco, as far as revenue and earnings are concerned, they have consistently improved on an annual basis, and they improved last quarter on a year-over-year basis. It’s impossible to predict future performance, but looking at a company’s recent website traffic can provide at least one clue. More traffic means the potential for increased revenue. Based on information from Alexa.com, the past three months have been mixed.

Over the past three months, pageviews-per-user has increased 1.3 percent to 3.95, time-on-site has declined 2.0 percent to 4:26, and the bounce rate (only one pageview per visit) has increased 5.0 percent to 47.5 percent. These numbers aren’t too impressive, but they’re not reason for concern, either. The bounce rate is a bit high and could use some improvement. If Cisco can keep more visitors on the page, then the potential for more business increases.

In regards to analysts, they love the stock: 29 Buy, 8 Hold, 5 Underperform.

Let’s take a look at some important numbers prior to forming an opinion on this stock.
T = Technicals Are Strong

Cisco has outperformed its peers over one-year and three-year time frames. It’s also the only company of the three that pays a dividend.

1 Month Year-To-Date 1 Year 3 Year
CSCO 17.38% 25.44% 50.22% 12.36%
JNPR 10.32% -2.75% 13.26% -20.23%
ALU 23.13% 30.22% 13.84% -25.82%

At $24.48, Cisco is trading above its averages.

50-Day SMA 22.29
200-Day SMA 21.02

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Cisco is slightly stronger than the industry average of 0.30.

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Debt-To-Equity Cash Long-Term Debt
CSCO 0.29 47.39B 16.25B
JNPR 0.14 2.66B 999.20M
ALU 2.28 8.09B 8.67B

E = Earnings Have Been Steady

Earnings have bounced around a little on an annual basis, but they have been solid. Revenue has consistently improved for three consecutive years.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 39,540 36,117 40,040 43,218 46,061
Diluted EPS ($) 1.31 1.05 1.33 1.17 1.49

Looking at the last quarter on a year-over-year basis, revenue and earnings improved.

Quarter Apr. 30, 2012 Jul. 31, 2012 Oct. 31, 2012 Jan. 31, 2013 Apr. 30, 2013
Revenue ($) in millions 11,588 11,690 11,876 12,098 12,216
Diluted EPS ($) 0.40 0.36 0.39 0.59 0.46

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?

Conclusion

For those who have owned shares of Cisco over the past five years, the stock has essentially gone nowhere. This is a negative considering the upward momentum in the broader market since March of 2009. On the other hand, the dividend payments likely helped ease levels of frustration for investors.

If you’re concerned about the market faltering when monetary stimulus is removed – or for any other reason – then it should be noted that Cisco didn’t hold up particularly well in 2008 – it lost approximately 40 percent (as did Juniper).

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Cisco is a well-run company that returns capital to its shareholders, but this doesn’t look to be an opportune time to get involved. Cisco is a WAIT AND SEE.

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.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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