What: Shares of Cisco Systems (NASDAQ:CSCO), one of the largest manufacturers of communications and information technology products in the world, gave back $0.03 on Friday to close at $29.43 despite receiving a significant price target increase from research firm Argus following its second-quarter earnings release this past Wednesday.
So what: According to James Kelleher, the covering analyst at Argus who maintained his "buy" rating on Cisco Systems, a combination of strong second-quarter results and valuation comparisons to the broader market led to a price target increase of 20%, from $30 to $36. A price target is merely where a research firm views a company as being fairly or fully valued.
As Kelleher expounded in a note to investors, Cisco Systems' year-over-year revenue growth rate of 7% to $11.9 billion was its quickest growth rate in three years. Despite the strong U.S. dollar playing spoiler to the top line of many U.S. multinationals, Cisco was able to report growth in a number of key overseas markets.
In addition, Kelleher and his team used comparable cash flow analyses along with traditional P/E analysis to come to its price target conclusion. While Kelleher notes that Cisco Systems' 2015 and 2016 estimated P/Es are above its 2010 through 2014 average, Argus' discounted cash flow model yields a price target of $52. When their models were blended, Kelleher and his firm came up with $36.
Now what: The question that investors need to really ask here is whether or not Cisco Systems' business improvements and its transition into cloud computing warrant up to another 22% upside from Friday's closing price.
On one hand there's plenty of reason to believe that Cisco Systems could hit its highest share price (above $34) since the dot-com bubble. For starters, we're witnessing genuine revenue growth and not just a bottom-line boost from cost-cutting and share repurchases. The implication would be that Cisco's push into the cloud and data centers is resonating with businesses around the globe. As my Foolish colleague Tim Brugger noted, we're still waiting on more specific data from Q4 on market share, but the revenue statistics imply Cisco did very well.
Then again, we also have to recall that Cisco laid off a lot of workers in order to invest heavily in research and development without having its expenses spike higher. The EPS boost is certainly nice, but scaling back its workforce could make it difficult for Cisco to grow at an attractive pace over the long term or to keep high-quality talent.
Personally, I still find Cisco to be an attractive long-term investment. Cisco has strong branding and pricing power, it's introduced a number of new cloud, big data, and security products over the past few years which have been well-received by businesses, and at 13 times forward earnings and sporting a nearly 3% dividend yield it's still reasonably priced. It's certainly a name that moderate risk-taking income investors should take a closer look at.