With Earnings on the Way, Is Cisco Still a "Value" Stock?

The stock-price movement Cisco (Nasdaq: CSCO  ) shareholders are experiencing is no doubt unsettling for long-term investors. The wild ride started with CEO John Chambers' announcement in late July of another round of layoffs, on top of last year's 10,000. The news was met with an immediate 5% drop in share price the following day. So, did an undervalued stock get even better with the decline? Investors and analysts certainly thought so.

Since the precipitous stock-price decline in late July, Cisco shareholders are in the midst of a 15% rise that's more than made up for a rough couple of days. That kind of appreciation is rarely a bad thing, but it raises a couple of questions leading up to Cisco's Aug. 15 earnings announcement -- is it still a value stock, or is it too late for bargain hunters to enjoy?

What constitutes value?
There's no single way to determine value in anything, let alone securities. Heck, people spend millions on old baseball cards, and then they turn around and sell them for a profit. But when it comes to the value of Cisco right now, comparing key financial data among similar companies makes the most sense. And from most perspectives, Cisco still looks like a value for long-term investors.

The specs
 
At $93 billion in market cap, Cisco is the undeniable leader in all things networking. Swedish-based Ericsson (Nasdaq: ERIC  ) , Motorola Solutions (NYSE: MSI  ) and Juniper Networks (NYSE: JNPR  ) generally play in the enterprise IT sandbox but can't approach Cisco's size and market share in key areas like data centers.

Relative to price, Cisco's trailing 12.8 P/E is the cheapest option of the four, and the forward P/E of 9 is better still. Based on this key metric, Ericsson's 13.7 trailing earnings multiple is the only one even close. Motorola Solutions and Juniper are two and three times as steep, respectively. Though book value comparisons are closer, key management areas including ROA and ROE, along with profit and operating margins, go to Cisco hands-down.

Cisco's dividend yield of 1.8% doesn't quite stack up to Ericsson's 3.55% or Motorola's 2.1% (Juniper doesn't pay a dividend). That brings to mind the $48.4 billion in cash on Cisco's balance sheet as of last quarter. With a net change in cash topping $3 billion last year it doesn't appear Cisco will need to dig that deep into the coffers to boost its payout. With that said, wouldn't a boost in income distributed to shareholders be nice to see? A minor point, perhaps, but worth consideration.

Looking ahead, there's little doubt the cloud is the future of computing, and Cisco recognizes what the estimated $13.5 billion market (by 2014, according to the IDC) can add to the bottom line. Cisco has a suite of cloud services, including addressing one of the big hurdles to widespread adoption of cloud technology: data security. The Cisco SecureX suite, mobile solutions, and data-loss prevention product lines should give Cisco sales reps plenty of ammunition, especially with an established client base to focus on.

From here
Though there hasn't been a tremendous change in analyst sentiment regarding the growth opportunity Cisco offers investors -- yet. They'll come around. Goldman Sachs issued an upgrade on Cisco to "Conviction Buy" status on Aug. 13, based on improvement in Cisco's fundamentals. Goldman expects stock-price appreciation of about 40% from existing levels, based on its $24 target price.

An analyst recommendation in and of itself doesn't warrant a buy or sell; it's just icing on the cake. But now add strong fundamentals relative to the industry, opportunities for revenue growth in emerging technologies, and one of the least expensive investment options around -- and Cisco remains a great value stock.

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Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool owns shares of Cisco Systems. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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