Cisco Investors Need to Watch These Key Areashttp://www.fool.com/investing/general/2012/11/14/cisco-investors-needs-to-watch-these-key-areas.aspx Tim Beyers
November 14, 2012
The global enterprise technology sector has been in somewhat of a rut lately as Europe stagnates, emerging markets slow, and the U.S. government tries to slash spending.
All this has resulted in relatively slow growth for the world's dominant IT franchises like Cisco Systems(NASDAQ: CSCO), Oracle(NASDAQ: ORCL), and IBM(NYSE: IBM) as companies large and small sit on their idle cash rather than delaying critical investments like IT spending. However, it's not all doom and gloom.
Yesterday, Cisco knocked its most recent quarterly earnings out of the park, rejuvenating investors' hope and driving a huge rally in its share price. However positive the earnings report was, it only explains a fraction of the overall Cisco investment thesis. To better inform investors about three of the most critical areas to watch for Cisco, the Fool has included below a key portion of its new premium research report on the networking giant.
What to watch: How hungry is Cisco?
For the most part, Cisco hasn't developed these segments in-house. Take the video business, which is largely the result of a 2005 acquisition of Scientific-Atlanta. Research and development spending as a percentage of revenue has declined from 13.5% in 2008 to 11.9% in the just-completed fiscal year. Acquiring growth rather than developing it isn't necessarily a bad idea. Oracle has performed well since kicking off a huge acquisition spree that began in 2005 with the hostile takeover of business software developer PeopleSoft. The stock has more than doubled since, easily beating the S&P 500's return over the same period.
Cisco hasn't been as fortunate. While Oracle has seen both revenue and profit rise more than 15% annually over the past five years, Cisco has suffered mostly slowing growth as debt has soared. Management's appetite for acquisitions has come at a cost:
But is this really so bad? Free cash flow has ballooned in at least three of the past five fiscal years, helping Cisco accumulate more than $32 billion in cash and investments — and that's above and beyond the company's debt load. War chests rarely come much bigger, and management is already getting aggressive with its treasure trove.
Recently, Cisco announced plans to hike