An Outrageously Cheap Tech Stock

Recent headlines for top networker Cisco (Nasdaq: CSCO) aren't promising. Most speak of little earnings growth and poor guidance. They're right.

The numbers aren't outstanding. Unless, of course, your idea of "outstanding" is somewhere south of "tell me there's at least some growth to report." There was, fortunately. Revenue improved by 8%.

And yet those who follow Cisco in our 120,000-strong Motley Fool CAPS community still see value in its shares:

Metric	Cisco
CAPS stars (5 max)	****
Total ratings	8,104
Bullish ratings	7,683
Percent Bulls	94.8%
Bearish ratings	421
Percent Bears	5.2%
Bullish pitches	1,176
Bearish pitches	69

Data current as of Nov. 12, 2008.

"What I consider to be the premier technology company with a moat that is defended in several ways," wrote CAPS All-Star brightsideLP in September. "They have built their name to mean the best and most reliable ... so much so that my buddy at CDW cant persuade IT guys to switch down to cheaper competitors. They would rather pay up and rest assured CSCO is powering them."

Talk about impressive. Cisco's competitors aren't exactly small fries. Juniper (Nasdaq: JNPR), Nortel Networks (NYSE: NT), and Alcatel-Lucent (NYSE: ALU) all produce billions in revenue. Yet Cisco, our Fool asserts, gets the quality award.

He has a point. In its annual survey of the top brands, Interbrand ranked Cisco's name 17th, worth $21.3 billion and up 12% from last year. Oracle (Nasdaq: ORCL), Apple (Nasdaq: AAPL), and Dell (Nasdaq: DELL) all ranked lower -- 23rd, 24th, and 32nd, respectively.

Heck, even Cramer likes Cisco at these prices.

And so do I
But where Cramer's thumbs-up is conditioned on weak competition, I like Cisco's valuation:

Company	EV-to-EBIT
Juniper	12.08
Cisco	9.19
Alcatel-Lucent	7.24
Nortel	4.97

Source: Capital IQ, a division of Standard & Poor's.

Why compare enterprise value to EBIT, otherwise known as "earnings before interest and taxes?" Because it gives a truer look at how investors are valuing Cisco's core business operations, independent of its cash-rich balance sheet. ($19.9 billion in net cash as of this writing.)

The numbers say that Cisco -- the heavy in its industry, the one with the widest moat -- is priced to grow almost twice as fast as Nortel, a sliver more than Alcatel, and a few hairs less than Juniper. How is that fair? Both Nortel and Alcatel-Lucent are ailing, and have been for a while.

Cisco, meanwhile, expects moderating-to-dismal growth in the current quarter and could see several months of further weakness. But for the long term, it's betting on hugely disruptive, Web-dependent technologies such as virtual worlds. Smart move. As our reliance on the Web increases, so does IT's dependence on Cisco.

Does that really sound like a company that -- on an EV-to-EBIT basis -- should be trading in the single digits? Especially when history says that Cisco hasn't traded for this cheap since at least 1993, when Capital IQ began tracking its financials?

Double down on cheap tech stocks
Only if you believe that the Web is no longer relevant, and that IT managers will never again invest in data-center equipment. But of course they will. We may see several quarters of recession-induced spending cuts first, but they will.

And when they do, Cisco -- cash-rich, big-brand Cisco -- will profit more than any other network equipment vendor.

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