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Is Cisco Systems, Inc Stock the Best Bargain in Tech?

By Tim Brugger - Sep 21, 2015 at 6:00PM

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The networking king can’t seem to catch a break from investors, which is just one of the reasons it’s worth a strong look.

Investors' initial reaction to Cisco's (CSCO 0.22%) fiscal 2015 Q4 earnings report on Aug. 12 was fairly positive. Cisco's stock price didn't exactly skyrocket after sharing its latest quarterly results, but it did climb to over $29 a share within days from its $27.90 pre-announcement level. Given its recent stock performance -- Cisco is down about 8% year to date -- that quick 4% appreciation was long overdue.

Alas, the good tidings didn't last. As of this writing, Cisco is trading well below pre-Q4 earnings levels, as are many stocks thanks to the broad market sell-off. And therein lies the opportunity. For a number of fundamental reasons, Cisco was worth strong consideration for growth and income investors prior to its recent share price decline. Now? It should move to the top of a value investor's list as well.

What's not to love?
It's not hard to find news of investors bemoaning the overall stock market's performance of late. After all, other than a few notable exceptions, it feels like most every stock has been swept up in a tide of negativity. For long-term investors, that undercurrent of pessimism should be a head-shaker. Why? Because stocks like Cisco, and its Internet of Things (IoT), cloud, and big data competitor IBM (IBM 1.81%), were already bargains: Now they're absolute steals.

Last quarter's 4% jump in Cisco revenue to $12.8 billion was certainly a positive, as was its 7.3% earnings-per-share (EPS) increase on a non-GAAP basis (excluding one-time items). Improved gross margins were also nice to see, particularly because they came as a result of Cisco deftly managing its expenses; even revenue grew. But it was how the networking king was able to increase sales, EPS, and enhance margins year over year that should put Cisco on an investor's shortlist.

Not surprisingly, the majority of Cisco's product revenue is still derived from switches and routers, to the tune of about 56% of its product sales last quarter. However, that relatively large piece of Cisco's revenue pie is shrinking, thanks to strong performance from its Collaboration and Data Center units, both of which represent Cisco's transition to new, high-growth markets like the cloud and IoT.

Cisco's collaboration unit -- a suite of products and services designed to help companies seamlessly manage the entire communications process, both internally and externally -- climbed 14% last quarter, generating over $1 billion in revenue. Data centers' nearly $900 million in Q4 was also a 14% improvement, and its 22% jump in fiscal 2015 compared to the prior year easily made it Cisco's fastest growing unit.

Another key objective new CEO Chuck Robbins is focused on is shifting to a "recurring revenue model," and it's working. Deferred revenue in Cisco's most recent quarter jumped 7% to $15.2 billion thanks to "subscription based and software offerings."

All things "smart"
The market for IoT, or the Internet of Everything (IoE), as Cisco refers to it, is expected to explode in the coming years as the world around us becomes connected. One conservative estimate suggests that smart cities alone will become a nearly $670 billion powerhouse in just four years, which fits very nicely into both Cisco's and IBM's wheelhouses.

Thanks in large part to its emphasis on big data and analytics as part of its "strategic imperatives" initiative -- which enjoyed a 20% increase in revenues last quarter -- IBM is also a smart city player. Though relatively small, the recent decision by the U.S. to invest $160 million to further smart city research demonstrates the growing importance of IoT. It's also telling that IBM was hand-picked to be a part of the ongoing research.

In Q3, Cisco opened its eighth "collaboration center" in Australia to help foster the development of new, cutting-edge IoE solutions. Cisco also unveiled its new "connected roadways" smart city solution to help manage traffic and enhance driver safety, among other benefits. Connected roadways come on the heels of several recent smart city wins for Cisco as it inked deals with some of the world's largest cities.

On the bottom line, Cisco is performing where it counts yet is trading at a ridiculously low 10.5 times next year's earnings, making it one of the least expensive tech stocks around. Now toss in its 3.25% dividend yield for good measure, and Cisco tops the list of the tech industry's best bargains.

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Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$43.45 (0.22%) $0.10
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$133.55 (1.81%) $2.38

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