Welcome to "Stock Smackdown," where two of your favorite stocks go head to head in a battle for superiority. They’ll each be judged on a series of objective merits, including valuation, earnings quality, and dividend quality. We’ll also take a look ahead at some more subjective measures -- Wall Street’s analysts will get their say, but so will The Motley Fool’s top market minds.
The winner will be the stock that racks up the most points at the end of the competition. Let’s go to ringside and meet our two combatants, Intel (Nasdaq: INTC) and Cisco Systems (Nasdaq: CSCO).
In this corner. . .
You’re almost guaranteed to make use of Intel's and Cisco’s hardware at some point over the course of your digitally-enhanced day. Although "Intel inside" may not mean as much in a mobile world dominated by ARM Holdings (Nasdaq: ARMH) processo r designs, the venerable chipmaker still controls almost all of the server processor market. Those processors just might be Cisco-branded -- after getting its start as a networking specialist, Cisco invaded the server market in 2009, and finally looks like it’s paying off, after a strong earnings surprise this week.
Both companies have their share of competition. ARM’s designs have helped Qualcomm (Nasdaq: QCOM) take the lead in smartphone and tablet processor placement, but there are plenty of other chipmakers with more of the action than Intel. That should soon change once Microsoft (Nasdaq: MSFT) makes its first foray into hardware manufacture. Its upcoming Surface tablet will be one of the first tabs built Intel-ready from day one.
Cisco competes with a wide array of companies that provide everything from hardware to software, and services for Internet connectivity. This is a fiercely-contested arena, with giants like Microsoft and Oracle to contend with, and Cisco’s had a rough go for a while. Fool analyst Tim Beyers points out the threats facing Cisco that forced painful personnel cuts last year, with more to come this year. Still, its latest earnings report perked up investor interest in a big way. There’s no time like today to put these two contenders in the arena to battle for a spot in your portfolio.
Valuation battle
We use many different numbers and ratios when talking about the value of a stock. The price-to-earnings ratio is the standard, so we’ll check each company’s current P/E, and five-year historical average P/E. We’ll also use price to free cash flow today. Earnings can be gamed with a number of different accounting tricks, but free cash flow is harder to manipulate, making it a favored metric here at the Fool.
In each case, the difference between a stock’s current ratio and its five-year average ratio will be more important than the numbers themselves. Stocks trading significantly lower than their average ratios may have more room to return to that middle ground.
For the tiebreaker, we’ll check one less-used financial metric: the debt-to-equity ratio. A company with little or no debt is usually in better shape than one leveraged to its eyeballs.
|
Metric |
Intel |
Cisco |
|---|---|---|
| P/E | 10.9 | 13.9 |
| 5-Year Average P/E | 18.2 | 17.2 |
| P/FCF | 13.7 | 12.1 |
| 5-Year Average P/FCF | 15.4 | 13.9 |
| Debt/Equity | 0.1 | 0.3 |
Source: Wolfram Alpha and YCharts. Winners in bold.
That was a close one! Intel wins with a lower level of debt to equity, but each company has solid valuation arguments in its favor.
Earnings quality battle
A company can be cheaply valued without being a good value. To balance out our valuation fight, let’s look at a few key earnings statistics for each company. We’ll look at gross and net margins, a five-year annualized rate of earnings growth, and consecutive years of both positive earnings and earnings growth since 1992, two decades ago. A company with no momentum today is less likely to become a superstar later -- it has happened before, but not often.
|
Metric |
Intel |
Cisco |
|---|---|---|
| Gross Margin | 63.8% | 61.4% |
| Net Margin | 22.7% | 16.1% |
| 5-Year Annualized Earnings Growth | 12.2% | 0.1% |
| Consecutive Profitable Years (since 1992) | 20 | 10 |
| Consecutive Years of Earnings Growth | 2 | 1 |
Sources: Morningstar and Wolfram Alpha. Winners in bold.
If the last battle came down to a photo finish, this one is clearly no contest. Intel takes the earnings quality crown with a clean sweep. It’s advancing on the overall title, but can it put Cisco away for good?
Dividend battle
A growing company is great, but one that pays you back is even better. Let’s see how strong and stable each company’s dividends really are. We’ll examine yield and two payout ratios, both the standard net income-based ratio, and the free cash flow payout ratios. We’ll also examine each company’s five-year annualized dividend growth rate, and each company’s current streak of uninterrupted payments.
Those payout ratios are important, particularly the free cash flow payout ratio. Companies that pay out more than they take in can rarely sustain such practices for long.
|
Metric |
Intel |
Cisco |
|---|---|---|
| Dividend Yield | 3.2% | 1.5% |
| Payout Ratio | 34.5% | 19.1% |
| Free Cash Flow Payout Ratio | 45.0% | 13.8% |
| 5-Year Annualized Dividend Growth | 10.6% | NM |
| Years of Uninterrupted Dividends | 20 | 1 |
Sources: Morningstar and Dividata. Winners in bold.
NM = not material due to insufficient data available.
Cisco had a lot of slack to increase its dividend payouts prior to this week’s big hike. However, its recent decision to pay any dividends at all simply can’t match up to Intel’s two-decade streak of payments -- not to mention its higher yield, even when taking Cisco’s new payouts into consideration. The networking giant’s new dividend rate, at recent share prices, would annualize out to a 2.9% yield.
Intel sweeps the valuation battles. Let’s see if analysts expect it to stay on top in the years ahead.
Battle for the future
Looking at the past is well and good, but let’s go further. How do the world’s most engaged market participants view these companies? Let’s see what Wall Street analysts expects from these companies, and what our Motley Fool CAPS community thinks.
|
Metric |
Intel |
Cisco |
|---|---|---|
| “Buy” Recs (% of Total Ratings) | 46.3% | 57.7% |
| 5-Year Annualized Forward Growth | 11.9% | 8.1% |
| CAPS Sentiment (% Outperform) | 93.7% | 95.3% |
Sources: Yahoo! Finance, Motley Fool CAPS.
Cisco captures a few more hearts and minds in the final battle, but it just isn’t enough to unseat Intel as the king of hardware companies. While challenges abound for both companies on the rapidly-changing mobile landscape, the technological hurdles to chip making success are simply higher than those of networking. Cisco’s on its way to becoming another high-tech dividend dominator, but Intel’s the only one with the history to earn that title.
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