Dueling Fools: Cisco Bull Rebuttal

Hmm. I gather this is the point in the debate where I'm supposed to disagree with Chuck, right? Well, honestly, I can't.

He's absolutely correct: Cisco (Nasdaq: CSCO  ) is dilutive. Cisco is a maturing business. However, neither of those facts affects the fact (how's that for a tongue twister?) that the stock's a bargain.

Cisco dilutes too much, no doubt. Yet at Motley Fool Stock Advisor, Fool co-founder David Gardner routinely recommends heavy diluters -- so long as they grow profits much faster than they grow share count. Activision (Nasdaq: ATVI  ) , eBay (Nasdaq: EBAY  ) , Marvel (NYSE: MVL  ) -- they all hand out stock options like Halloween candy. But the numbers don't lie: David's picks have beaten the market by a 3-to-1 margin over the past three years.

And sure, Cisco is maturing. But "mature" isn't the same thing as "dead." Consider: General Electric (NYSE: GE  ) is no small-cap, start-up rocket stock. Yet earlier this year, GE promised investors that it would grow profits at a 15% annual rate over the next two years. GE dominates its markets, and "mature" as it is, this quality business continues to grow strongly. By Chuck's own admission, Cisco, too is a "rock-solid" business, has a "well-deserved reputation for quality," and a "commanding lead over [its] rivals." Judging from last year's performance, even if 40% growth is unlikely, I have little doubt it can grow profits faster than its 10-12% revenue projections.

Based on that assumption, I've run Cisco's numbers through the Fool's Discounted Cash Flow Calculator (available for use 24/7 to all subscribers to our Inside Value newsletter). Using the 15% long-term earnings growth rate that analysts expect Cisco to achieve (and tapering that growth off over time), I see Cisco as roughly 17% undervalued today.

So I'll say it again: Cisco's on sale.

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

Fool contributorRich Smith does not own shares of Cisco. If he did, The Motley Fool would require him to tell you so. We're sticklers about stuff like that.


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