2 Reasons to Revisit Cisco

Ever since analysts tried to pin a "value" moniker on Cisco Systems (Nasdaq: CSCO  ) -- because the company opted to address the actual investment landscape and begin paying a dividend -- I have been a huge advocate of owning the stock. Now, as November has come to a close, it has become the best-performing stock in the Dow, up roughly 11%. Over the course of the last week, Cisco announced another acquisition and received a reiterated outperform rating. While neither event is a catalyst on its own, the combination should serve as a reason to put the stock back on your radar. Even after the price appreciation, Cisco belongs in your core portfolio at current levels.

The reiteration
Simon Leopold, an analyst at Raymond James, recently reiterated his price target  on shares of Cisco at $25, leaving his rating at outperform. In his prediction about what the upcoming analyst day may reveal, Leopold says: "We expect Cisco outlines its strategic vision to become a broader IT supplier with a greater software bias, which aids margin. We doubt the event represents a material catalyst, but should clarify Cisco's vision. As a tech bellwether, Cisco's commentary sets the table for the 2013 macro environment. We expect Cisco maintains its 5-7% long term growth target while offering cautious commentary on the near term."

The position is not a new one, making it insufficient to alone serve as a catalyst, but is useful in exemplifying the prevailing view of the stock among analysts. The software bias to which Leopold refers is a bit of an understatement. As far back as August, Cisco announced that it continues to deepen its strategic partnership with cloud computing leader VMware (NYSE: VMW  ) . The mandate of the partnership is a jointly funded yet independent team of engineers that is focused on bringing the software-defined data center to market. This technology has the potential to redefine the space, becoming the technology equivalent of a new blockbuster drug.

The acquisition
Cisco also recently announced that it was acquiring Cariden Technologies for $141 million. Cariden, which makes software that allows users to manage telecom networks, is the ninth acquisition in the software or cloud arena this year. The market reacted well to the announcement, trading up roughly 1% on the news.

The addition to Cisco's empire has been well received. Jess Lupert of Wells Fargo, which also maintained an outperform rating on the stock, sees the acquisition as a positive  add-on: "Cariden's solid early operating metrics which include 50% CAGR over the past five years, 95%+ renewal rates, and wins with multiple tier1 providers. Separately, we believe Cisco should also benefit from Cariden's MPLS expertise, which is a dominant WAN technology that may help Cisco better compete as the routing and optical layers converge."

Overall, Cisco continues to address both its future and present by maintaining dominance in existing business lines and simultaneously developing new ones.

The peers
With a market capitalization of more than $100 billion, it is hard to properly classify other companies as true competitors to Cisco, but there is some value in considering these peers. With a P/E of 12.2, year-over-year quarterly revenue growth of 6%, and an operating margin of 23%, Cisco looks very strong fundamentally. Alcatel-Lucent (NYSE: ALU  ) , with a market cap of $2.5 billion, Juniper Networks (NYSE: JNPR  ) , with a market cap of $9.3 billion, and Hewlett-Packard (NYSE: HPQ  ) , with a market cap of $25.5 billion, are the best comps. Alcatel is trading at a P/E of 2.2, while Juniper trades at 50.5, and HP had negative earnings. On this basis, Alcatel looks interesting, but the strength of Cisco is clear.

In terms of year-over-year quarterly revenue growth, only Juniper grew, and only at a rate of 1%; Alcatel had negative 3% growth, while HP shrunk by 7%. On an operating basis, none of the three are close. Juniper has an operating margin of 10% relative to 0% for Alcatel and 8% for HP. While HP continues to be strong in its networking business, lagging PC sales have hurt the company significantly. Alcatel is battling a myriad of internal issues, while Juniper is likely the strongest competitor. In terms of fundamentals, however, Cisco leads the pack.

The trade
While neither of the news events above is a sufficiently strong catalyst to justify buying the stock on its own, the overall positioning of the stock makes it a must-have for your core portfolio. In additional to strong strategic partnerships and an impressive series of acquisitions, while still leaving the company sitting on $45 billion in cash, Cisco's 3% dividend yield adds an attractive income element. Ultimately, whether you categorize the stock as a growth name or as a value play, Cisco belongs in your core portfolio for the long term.


 
 

Once known only as a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the lowdown on the routing juggernaut in The Motley Fool's premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as its story changes, so click here now to read more.


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