Dueling Fools: Cisco Bear Rebuttal

Rich, you know it's easy for companies to manipulate earnings to meet targets. Look deeper at Cisco Systems' (Nasdaq: CSCO  ) operations, and you'll find the company is not firing on all cylinders.

Sure, reported net earnings per diluted share skyrocketed 40%. Operating cash flow (a truer measure of corporate health), however, gained an anemic 8.5%. Slower than revenue growth, which indicates that those new dollars were tougher to earn. That's no picture of strength. Oil giant ExxonMobil (NYSE: XOM  ) , on the other hand, grew its operating cash flows faster, yet it still trades at a lower earnings multiple.

At the same time, management forecasts 10-12% revenue growth for this fiscal year. That's a deceleration from last year's 12.5%. While 10-12% is not bad, it's just another indication of Cisco's status as a maturing, cyclical company.

Also, while Cisco's cash hoard is nice, cash is a dangerous and expensive asset to hold. It's dangerous because it needs to be deployed intelligently in order to be useful. Poorly deployed cash directly costs shareholders money -- reference Cisco's own $9 billion equity lost from its options and buyback program.

Cash is expensive because, currently, cash earns just over 3% in an ING (NYSE: ING  ) savings account and not much more than that in long-term treasuries. Every dollar hoarded by the company above that which is required to operate or expand the business or to provide a reasonable buffer is a dollar that belongs to the owners. Shareholders deserve the opportunity to search for higher returns elsewhere.

Likewise, I trust Warren Buffett, but Berkshire Hathaway's (NYSE: BRKa  ) (NYSE: BRKb  ) super-sized cash hoard is a primary reason why I'm not invested there, either.

Bottom line: There are more shareholder-friendly companies trading at more attractive valuations elsewhere, so my money is staying away from Cisco.

You're not done. This is just one part of a four-part Duel! Don't miss Chuck's original bear argument or Rich's bullish argument and rebuttal. When you're done, you're still not done. You can vote and let us know who you think won this Duel.

At the time of publication, Fool contributorChuck Salettahad no financial position in any of the companies mentioned in this rebuttal article. The Fool has adisclosure policy.

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Chuck Saletta

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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