The Razor’s Edge
2-Year Price History
Recent Price
(2/5/2009)
$16.35
52-Week Price
$11.78 – $27.72
Market Capitalization
$95.7 Billion
Most Recent Dividend
$0.00
About Cisco Systems, Inc.
Cisco Systems, Incorporated is considered to operate in the Technology
sector. They specifically operate in the Networking & Communication Devices
business segment contained within the Computer Hardware industry.
The Company designs, manufactures and sells Internet Protocol based networking and other products related to the communications and information technology industry and provides services associated with these products and their use.
Ockham’s Rating
At Ockham Research, we believe that there is extremely useful information to be gleaned from historical evidence. When a stock is out of line with historical norms it could definitely be a signal that it is overvalued or undervalued. But as proponents of the Efficient Market Hypothesis will tell you, the market is never wrong about stock prices because everything that can be known about a stock has already been priced in. However, in extreme cases, such as the Tech bubble in the early 2000’s or more recently the credit crisis demonstrates there are certainly times where historical evidence can be misleading. Episodes such as this do prove that times of great market correction either positive or negative can be driven by factors outside of fundamentals.
Well, what can you say about this market? No one likes to see the market going down so rapidly, but in times like these value investors should be cautiously opportunistic, as the market’s decline has certainly uncovered some great bargains. We are simply reiterating CSCO’s Undervalued rating as of this week, as CSCO’s sector has resisted the downturn to some extent. Our analysis of this stock is little changed since last week’s report, but please continue reading for further justification of our Undervalued rating.
For starters, the price of CSCO declined from $15.89 as of 01/24/2009 to a price of $14.97 as of 01/31/2009. While this decrease of 5.79% was not large enough for Ockham to upgrade the stock, it does however slightly increase the attractiveness of CSCO, assuming that the fundamentals remain at current levels.
As of this report, there have been no meaningful adjustments in cash earnings expectations or guidance in the last week.
CSCO Stock Evaluation
As noted in the Recommendation Summary, we are content with maintaining our Undervalued rating on CSCO. Although there has been no additional earnings guidance offered by CSCO’s management in the last week, the stock price has decreased by 5.79%, which is a positive from a value perspective. However, while the price decrease does make the stock more attractive, it is only marginally more attractive and not enough to warrant an upgrade. Find more on this and other fundamental factors in our analysis in the paragraphs that follow.
CSCO Revenue
For a long time, value investors have used the current share price relative to sales per share levels as an important valuation tool. We utilize a historical weighted average methodology that treats recent years more importantly in the calculation. When looking at CSCO through this framework, we can see that our weighted average historical high and low Price to Sales per share ratios over the last 10 years are 5.64x and 3.09x respectively.
Utilizing this range we can see that CSCO’s current Price to Sales per share ratio of 2.10x is significantly below its average levels historically. In fact, with a current price of $14.97, CSCO is a full 52% below its average Price to Sales ratio at comparable sales levels. This is a rare occurrence and, when taken in context of the other areas of our analysis, can be a strong positive for our outlook for CSCO.
CSCO Cash Earnings
Looking at CSCO specifically in their Cash Earnings capabilities, Ockham views CSCO as significantly below its historical average multiple of cash earnings as calculated by Ockham. Similar to our analysis of sales per share, Ockham looks at the last 10 years of cash earnings levels for CSCO to identify where the current high and low price levels have been historically in relation to profit per share. Again, we utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides us with an average high Price to Cash Earnings ratio per share of 24.37 and a 14.11 low over the same period.
Now that CSCO’s current price is $14.97 and its Price to Cash Earnings ratio is 7.92, we are very positive on its outlook from the cash earnings perspective. In fact, CSCO is now trading a full 59% below its average historical Price to Cash Earnings ratio at these profit per share levels. When our clients ask us why CSCO has great long term potential, the Cash Earnings levels to current stock is one of our primary reasons. But naturally, now we need for the overall market to recognize this disparity.
CSCO Dividends
A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure on a company’s inherent expectations. While we do like to see companies with healthy and growing dividends, it is not appropriate for all companies, especially those focused on growth. We regard CSCO as neutral in terms of dividends because they have no history of paying a dividend and continue to reinvest that money for growth purposes.
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