Analyst Report
RecommendationPrice Performance
Key Ratios
Cloud Computing: Growth in
cloud computing presents opportunities for growth in revenues. Technology will
combine applications to offer cloud infrastructure.
Growing data usage: Mobile
data and video are expected to increase at a CAGR of 78% from 2011 to 2016, data center traffic at 31% and cloud data traffic at 43% during the same time frame.
Economies of Scale: Cisco has
managed to keep its costs low relative to its growth. Cisco is larger than its top 5 competitors put together—providing the company with the resources to develop innovative products.
Great Multiples: Cisco is
currently trading at a historically low price to earnings ratio of 11.29 and price to book of 1.75.
Competition: Rapid technology
changes could invite competition or make it difficult to penetrate market regions with pre-established companies. Additionally, competition may become highly specialized in products or services that Cisco does not have yet.
Supply: Cisco is highly
dependent on its suppliers and manufacturers for its products. Cisco’s reliance on others in its supply chain could lead to product shortages and damaged reputation if there is a delay upstream.
Macroeconomic: The networking
and communication device industry is very dependent on its customers who need to have the resources to purchase more advanced network equipment and services. Therefore, any major downturn in the economy will affect cisco’s growth and revenue. Current Price $16.82 Intrinsic Value $23.95 Market Cap 89.3 Billion Equity Analyst: Ryan McCollum Joshua Ali Arian Howard Syed Hasan Valuation Analysis Price/Earnings 11.29 Forward P/E 8.7
Price/ Cash Flow 8.1
Dividend Yield 3.3%
Price to Book 1.8
Profitability Analysis
Return on Equity % 16.3% Return on Assets % 9%
Growth Rates (1 YR Period)
Revenue % 6.6%
Operating Income 31.2% Earnings/Share % 27.4% Stock Total Return % -2.4%
Investment Thesis Risks
Company Highlights Cisco is the largest network communication company in the United States, dominating many of the business segments that it competes in. Cisco faces fierce competition in web conferencing, routers, switches, storage area networks, digital video and network security.
5-year Target Price $28.42
Value Drivers Technology Trends
GDP Growth of BRIC Nations: Rising incomes and
the industrialization of emerging economies are expected to be a key drivers for growth in this industry and are expected to grow steadily in the next 3-5 years given the outlook of the economy.
Global Per Capita Disposable Income: Emerging
economies have low exposure to information technology and increases in disposable income will provide opportunities for strong sales growth. Based on our economic outlook this will be a key factor in the growth of the industry and is expected to steadily increase.
Strategic Alliances: Cisco has been successful in
building a strong relationship with its suppliers which is a key factor for growth in this industry. Furthermore, Cisco has entered in global strategic collaborations with the telecommunication market in Korea to bridge the IT and communications gap. Cisco has also partnered with companies in areas that produce industry advancement and acceleration of new markets helping the Cisco market its products more efficiently.
Internet Access: Internet traffic is expected to
grow at a rate of over 50% per year until 2016. The increasing use of data is putting a strain on older networks which will lead to upgrades in network equipment to improve the infrastructure.
Focus on Efficiency: After years of focusing on
growth, Cisco has moved to make cuts to improve operational efficiency. Management cut $1 billion of operating expenses by overhauling its operating structure. We believe this initiative will allow Cisco to keep prices competitive without lowering margins.
Cloud Computing: Cloud computing is a
pay-per-use consumption and delivery model that enables real-time delivery of configurable computing resources such as networks, servers, storage, applications, and services. According to research done by IBM, cloud adoption is growing five to eleven times faster than traditional software and large portions of IT budgets are moving over to the Cloud. Cisco has made several acquisitions such as the recent purchase of vCider, a leading software virtualization firm, to expand its Cloud portfolio. Cisco is well positioned to take advantage of this trend.
Software-Defined Networking (SDN): is causing
disruption in the networking industry, as it lets businesses move many networking features off expensive networking gear and onto cheap servers. This is a potential threat to Cisco’s high end switches, however the company has invested heavily in its Cisco Open Network service and over $100 million in spin-in Insieme to provide Software-Defined Networking compatible hardware.
IPv6 Transition: Internet Protocol (IP) defines how
computers communicate over a network. IPv4
contains just over 4 billion unique IP addresses, which were completely allocated by February 3, 2011. As the internet expands, organizations will have to transition to IPv6 addresses. Cisco led the way in developing standards on the integration of IPv6 in 1996. Today, it offer a broad range of products, services, and training to help customers establish a plan to implement IPv6. We see Cisco as the clear leader to provide IPv6 solutions.
Increased Mobility: Today, people expect their
workspace to move with them. From bring-your-own-device (BYOD) environments to shared workstations, they want to be able work from multiple devices. From 2010 to 2011 there was a 30 percent increase in the number of consumer devices accessing business applications. Cisco’s Unified Workspace service, which allows employers to unify their resources and people through an intelligent network platform, will allow the company to benefit from this trend.
Cisco has operations in the North America, Latin America, Europe, the Middle East and Africa, and Asia Pacific regions. No single customer accounts for 10% or more of the company’s net sales. Its customers primarily consist of the following sectors:
Enterprise: Enterprise businesses are large organizations with
multiple locations or branch offices that typically employ 1,000 or more employees. Many enterprise businesses have unique IT, collaboration, and networking needs allowing Cisco to design entire network interfaces. Recent enterprise trends include the growing use of Platform as a Service (PaaS): a way to rent hardware, operating systems, storage, and network capacity over the Internet, and users increasingly bringing their own phones and devices to use on company networks.
Service Providers: Service providers offer data, voice, video, and
mobile/wireless services to businesses, governments, utilities, and consumers worldwide. Service providers use a variety of routing and switching, optical, security, video, mobility, and network management products, systems, and services for their networks.
Commercial businesses: are companies with fewer than 1,000
employees. These customers typically require the latest advanced technologies that enterprise customers demand, but with less complexity.
Public Sector: The public sector includes federal, state and local
governments, as well as educational institution customers. Many public sector entities have unique IT, collaboration, and networking needs within a multivendor environment. Recently the White House has implemented a "cloud first" policy that requires agencies to consider cloud computing as an option when evaluating their IT needs, in an attempt to slash the number of federal data centers from 2,094 facilities to 1,132 by 2015.
Cisco’s management has taken efforts to slim down its complexity and focus on five priorities: leadership of core business, collaboration, data center visualization and cloud, video, and architectures for business transformation. Although Cisco management has trouble in the past with a nine committee structure it is now moved to a more efficient version less bureaucratic structure.
We believe that Cisco’s management is on the right track moving forward even with the departure of people such as Ned Hooper and Paul Mountford. We see the recent job cuts and focus on hiring personal for its faster growing segments as evidence that Cisco management will position the company in the right place for the technology changes going on in its industry. Cisco executive management is aligned with shareholder interest through short- and long-term performance based awards. John
Chambers is Chairman of the Board and Chief Executive Officer of Cisco System Inc. He has been with Cisco since 1991; his compensation package in 2011 was $12,886,125 with a base of $375,000 and the rest coming from stock awards.
Cisco started to pay a dividend on April 30, 2011 of $0.06 to increase its return to investors. On October 2, 2012 Cisco increased its
dividend by 75% from $.08 to $0.14 as well as committing to return 50% of its free cash flow to dividends and share buybacks. Additionally, Cisco has a long history of share buybacks and currently has 5.6 billion dollars authorized for additional buybacks in the future.
Cisco Systems designs, manufactures, and sells Internet Protocol (IP)-based networking, products related to the communications and IT industry. It also provides services associated with these products and their use. The company operates in several segments: Switching, Next-Generation Network (“NGN”) Routing, Collaboration, Service Provider Video, Wireless, Security, Data Center, and Other Products. Switches and routers make up half of Cisco's product revenue. The remaining portion comes from a collection of smaller businesses, data centers, enterprise wireless, and security. Given Cisco's extensive product portfolio and broad reach we believe that there is robust potential for growth in enterprise services and service providers' IT environments services. Services have been an area of strength for the company over the past 5 years as service revenue has grown 12% in fiscal 2012 to $9.7 billion.
We see Cisco’s vast product and service portfolio as a strategy to position itself to take advantage of recent and upcoming customer trends.
Customer Profile Management Overview
There are several sub-industries that Cisco competes in, but the company mainly focuses on networking and
communications devices. The telecommunications equipment industry has struggled from 2007-2012 as a result of the global economic crisis, however demand for routers and switching equipment has increased. Sales of network devices have increased in the industry despite the products being sold at a lower average selling price. Growth in network equipment sales have been driven by the increased consumption of digital content and information. Global revenue will become increasingly important as of the rise in disposable income in the emerging markets continue. Emerging markets are a key factor in the growth of the industry as it will lead to an increase in demand for information technology in countries like China.
The expansion of ISP and broadband connections has helped industry revenues to recover. Overall, the network and communications manufacturing industry is expected to grow at an annualized rate of approximately 4.7% as we see a slow but steady economic recovery and growth in digital information. Growing demand for information technology and product innovations will provide a platform for growth; however this may be hampered by competition from new products being released.
Demand for Cisco’s products is expected to increase due to the adoption of new IT technologies by large companies and consumers. We expect that over the next 5 years US-based manufacturing facilities will continue to decrease. Strong
emergence of competitors, technological innovations and the commoditization of production components will keep prices for communications equipment down resulting in dampened growth in the industry. Moreover, increased reliance of
consumers and enterprises on video, voice and data will promote demand for carrier network bandwidth. This has resulted in a shift by service providers towards Internet Protocol based network that can provide these services simultaneously. This will increase the demand for routing and switching services leading to increased revenue growth in the industry globally 3.3%. Industry Outlook
Economic Outlook
We believe that the current state of the US economy will be moderate in GDP growth. We expect GDP to grow between 2% and 3% in the US. Furthermore, the Fed’s continued efforts for quantitative easing will help lower unemployment numbers from their current rates. Higher employment combined with lower interest rates will incentivize consumer spending. We also expect continued growth in emerging economies such as India and China as well, due to the globalization of businesses, as we believe these countries will play a vital role in the revival of the global economy. However, we do see Europe still struggling to recover in the midst of the economic crisis. We believe as the economy slowly improves enterprise IT investment in the US and emerging markets will be able to overcome Europe’s soft economic outlook. There is also the possibility of decreased United States Government spending, however we do not see this having a material effect on Cisco’s growth, as the recent Government initiative to save an estimated 5 billion dollars a year through the consolidation of data centers should help fuel Cisco’s revenues.
Competition
Across all of Cisco’s business units there is fierce competition. While barriers to entry are relatively low, there are few competitors that have the resources to offer the integrated solutions of Cisco. Juniper Networks seems to be Cisco’s main competition when it comes to providing complete network solutions. Cisco’s brand recognition amongst clients sets the communication network company apart from the competition. Cisco expects to face price-focused competition moving forward in many of its business units.
Citrix:
Citrix holds 14% of the web conferencing market compared to Cisco’s 38%. Citrix makes an effort to compete on price to capture market share. Citrix’s GoToMeeting product competes directly with Cisco’s WebEx.
Microsoft:
Microsoft stays competitive in Web conferencing by offer-ing a complete cloud collaboration suite in Office 365. Mi-crosoft’s specific program for web conferencing is Lync, which also competes with WebEx.
Vmware:
Cisco faces stiff competition from VMware which just acquired Nicira for $1.26 billion to work on its Software Defined Networks (SDN). VMware is an industry goliath when it comes to cloud computing with a $37 billion market cap.
Brocade:
Brocade has recently purchased Vyatta which is a company that develops open source network operating systems which are utilized in software-defined networking and cloud computing platforms. Vyatta has rivaled Cisco’s SDN.
HP:
With only 8.3% of the market share, Hewlett Packard (HP) is Cisco’s closest competition when it comes to switches. HP specializes in Ethernet switching and has been battling Cisco ever since HP’s acquisition of 3com in 2010.
Huawei and ZTE:
According to a report by the US House Intelligence Committee both Huawei and ZTE are viewed as threats to national security and may use network communication devices to threaten the national security. This news drastically hurts the potential for the Chinese companies to penetrate domestic markets.
Company Price P/E (Cur) P/E (FY1) Price/Book
Price/Cash
Flow Price/FCF Price/Sales
Cisco 16.82 11.3x 8.7x 1.74 6.7x 8.6x 1.9x Alcatel-Lucent 1.11 15.9x 4.0x 0.59 2.8x 9.2x 0.1x HP 13.61 NM 3.4x 0.85 22.7x 2.9x 0.2x Vmware 87.59 51.5x 31.1x 6.74 10.6x 13.4x 2.6x Juniper 17.65 50.4x 22.3x 1.28 18.2x 35.4x 2.1x Average 31.5x 8.2x 1.87 8.3x 9.1x 0.5x
Web Conferencing Cloud Computing/SDN
Switches Emerging Markets
Routers
Juniper Networks:
Juniper Networks is the main competitor for Cisco when it comes to routers, switchers, and network securities. Infrastructure accounts for about of 75% of sales while SLT (Service Layer Technology) accounts for the other 25%. Juniper is posed to see stronger growth within the switch business because of its 2009 acquisition of NetScreen. Alcatel-Lucent:
Alcatel-Lucent is another competitor that challenges Cisco’s router business. Networks account for 62% of sales of Alcatel-Lucent. Its service segment accounts for 25% of its sales which includes network integration.
Profitability Analysis 2008 2009 2010 2011 2012 Industry
Return on Assets 14.37 9.67 10.41 7.72 8.99 7.5
Return on Capital 20.22 13.6 14.32 10.5 12.21 9.4
DuPont Analysis 2008 2009 2010 2011 2012 Industry
Financial Leverage 1.71 1.76 1.83 1.84 1.79 1.70
Net Profit Margin 20.36 16.98 19.40 15.02 17.46 14.60
Asset Turnover 0.71 0.57 0.54 0.51 0.52 0.50
Return on Equity 24.72 17.03 19.17 14.09 16.25 12.41
Ratio Analysis
DuPont
Return on equity has decreased from the 5-year high of 24.7% in 2008, mainly attributed to lower net profit margins, likely due to increased competition, and lower asset turnover ratios due to a 15% and 17% increase in total assets in 2009 and 2010. Return on equity remains much higher than the Networking & Communication Devices industry average and we see the ratio expanding as management’s initiative to become more efficient and less complex in structure will lower unnecessary fixed assets and improve bottom line margins.
Financial Conditions 2008 2009 2010 2011 2012 Industry
Short-Term Liquidity
Current Ratio 3.24 2.67 3.27 3.49 3.49 3.4
Quick Ratio 2.8 2.33 2.99 3.2 3.2 3
CFO/Current Liabilities 87.23% 72.48% 52.89% 57.57% 64.81%
Long Term Solvency
Interest Coverage 33.1 23.2 16.1 13.5 18 1.5
Debt/Equity Ratio 27.00% 28.00% 34.00% 32.00% 32.00% 27.00%
CFO/Total Liabilities 49.58% 33.57% 27.60% 25.28% 28.39%
Short-Term Liquidity
Cisco has maintained more than adequate term assets to cover term liabilities and could cover 65% of short-term liabilities with 2012 cash flows from operations. Short-short-term liquidity risk remains lower than industry average, and the chance that the company will face liquidity problems is minuscule.
Long-Term Solvency
Cisco remains in a good position to meet all long-term obligations, consistent with management’s goals to maintain a strong balance sheet. Cisco had $48.7 billion in cash and investments as of July 28, 2012 while total debt stands at $16.3 billion. Efficiency 2008 2009 2010 2011 2012 Industry Receivables Turnover 10.13 10.32 9.88 8.98 10.16 9.9 Inventory Turnover 10.99 11.28 11.99 11.86 11.34 9.6 Asset Turnover 0.71 0.57 0.54 0.51 0.52 0.5 Efficiency
Valuation
We used two models to calculate the intrinsic value of Cisco’s stock. These models were the free cash flow to equity and relative price to earnings model. We used the capital asset pricing model to calculate a 10.45% discount rate. This model assumes a beta of 1.20, and a market risk premium of 7.25% over current 10-year treasury rates for the next 3 years, and a 6.07% premium over historical 10-year treasury rates thereafter.
Free Cash Flow:
We believe that Cisco has room to increase its current payout ratio of 19% and therefore used a free cash flow to equity model. We believe that Cisco’s free cash flows will grow at an average rate of 10% over the next 5 years and then grow at an annual rate of 3% thereafter. Using these assumptions, we calculated an intrinsic value of $23.95 and a five year target price of $28.42, which implies a 42% premium over the stocks current market price.
P/E Valuation;
According to our price to earnings model Cisco has an intrinsic value of $24.67. We reached this value from using a P/E ratio of 11.29 and an average EPS growth rate of 8% as inputs. The used P/E is at a historically low for the company who has a five year average P/E ratio of 17.7. Even with this low ratio we found that Cisco was undervalued.
Scenario Price Sensitivity
Optimistic 15%
Top line growth rate 8%
Cisco takes more market share in emerging markets Gross margins from new technologies services increase
6% to 66%
Intrinsic Value $28.07 Most Likely 65%
Top line growth rate 5%
Cisco makes use of large R&D to maintain leadership position in the market
Cisco benefits from the increasing data use and new technologies trends leave gross margins at 62% Intrinsic Value $23.95
Pessimistic 20%
Top line Growth rate 3%
Competition takes away cisco market share in estab-lished markets and dominates new technology markets In order to compete, Cisco must lower price, harming
gross margins, bringing them down 3% to 60% Intrinsic Value $14.49 Average Value $22.67 Sensitivity Analysis 8.45% 9.45% 10.45% 11.45% 1.5% $25.63 $22.33 $19.77 $17.72 2.0% $27.10 $23.39 $20.56 $18.33 2.5% $28.81 $24.60 $21.45 $19.01 3.0% $30.83 $26.00 $22.47 $19.77 3.5% $33.27 $27.64 $23.62 $20.62 4.0% $36.25 $29.57 $24.96 $21.59 4.5% $39.98 $31.89 $26.52 $22.70 5.0% $44.80 $34.74 $28.37 $23.97 Analyst Coverage Rating Analysts Strong Buy 10 Buy 19 Hold 14 Underperform 3 Sell 0
Consoli da ted Incom e Sta teme nts Jul 20 10 Jul 20 11 Jul 20 12 Jul 20 13 Jul 20 14 Jul 20 15 Jul 20 16 Jul 20 17 Revenue $ 40 ,04 0 $ 43 ,21 8 $ 46 ,061 $ 48 ,364 $ 50 ,782 $ 53 ,321 $ 55 ,987 $ 58 ,78 7 Cost of sale s $ 14 ,39 7 $ 16 ,68 2 $ 17 ,852 $ 17 ,895 $ 18 ,789 $ 19 ,729 $ 20 ,715 $ 21 ,75 1 GROS S MARGIN $ 25 ,64 3 $ 26 ,53 6 $ 28 ,209 $ 30 ,469 $ 31 ,993 $ 33 ,592 $ 35 ,272 $ 37 ,03 6 OPE RATIN G E XPENSES: Research and devel opment $ 5 ,2 7 3 $ 5 ,8 2 3 $ 5 ,4 8 8 $ 5 ,8 0 4 $ 6 ,0 9 4 $ 6 ,399 $ 6 ,7 1 8 $ 7 ,0 5 4 Sales and marke n g $ 8 ,7 8 2 $ 9 ,8 1 2 $ 9 ,6 4 7 $ 9 ,6 7 3 $ 10 ,156 $ 10 ,664 $ 11 ,197 $ 11 ,75 7 General and admi nistra v e $ 1 ,9 3 3 $ 1 ,9 0 8 $ 2 ,3 2 2 $ 2 ,4 1 8 $ 2 ,5 3 9 $ 2 ,666 $ 2 ,7 9 9 $ 2 ,9 3 9 Am orza on $ 4 91 $ 5 20 $ 3 83 $ 2 64 $ 65 - - Restruc tu ring an d Other Charges $ $ 79 9.00 $ 30 4.00 - - - - - To tal o perang expenses $ 16 ,47 9 $ 18 ,86 2 $ 18 ,144 $ 18 ,159 $ 18 ,854 $ 19 ,729 $ 20 ,715 $ 21 ,75 1 OPE RATIN G IN COME $ 9 ,1 6 4 $ 7 ,6 7 4 $ 10 ,065 $ 12 ,310 $ 13 ,139 $ 13 ,864 $ 14 ,557 $ 15 ,28 5 Interest inc ome $ 6 35 $ 6 41 $ 6 50 $ 7 27 $ 7 61 $ 7 96 $ 8 33 $ 87 1 Interest exp ense $ 6 23 $ 6 28 $ 5 96 $ 7 63 $ 7 83 $ 8 16 $ 8 40 $ 87 6 Ot her incom e, net $ 2 39 $ 1 38 $ 40 $ 1 39 $ 1 39 $ 1 39 $ 1 39 $ 13 9 Interest and o th er inc ome, net $ 2 51 $ 1 51 $ 94 $ 1 03 $ 1 16 $ 1 19 $ 1 32 $ 13 4 Ear ning s b e fore Taxes $ 9 ,4 1 5 $ 7 ,8 2 5 $ 10 ,159 $ 12 ,413 $ 13 ,255 $ 13 ,982 $ 14 ,688 $ 15 ,41 9 Provi sion fo r inc ome t axes $ 1 ,6 4 8 $ 1 ,3 3 5 $ 2 ,1 1 8 $ 2 ,6 9 4 $ 2 ,876 $ 3 ,034 $ 3 ,1 8 7 $ 3 ,3 4 6 Net Inc ome $ 7 ,7 6 7 $ 6 ,4 9 0 $ 8 ,0 4 1 $ 9 ,7 1 9 $ 10 ,379 $ 10 ,948 $ 11 ,501 $ 12 ,07 3 In Millions
Consolidated Balance Sheet 2010 2011 2012 2013 2014 2015 2016 2017 Current assets:
Cash and cash equivalents $4,581 $7,662 $9,799 $10,289 $10,803 $11,344 $11,911 $12,506 Investments $35,280 $36,923 $38,917 $40,863 $42,906 $45,051 $47,304 $49,669 Accounts receivable $4,929 $4,698 $4,369 $5,304 $4,853 $5,812 $5,386 $6,372
Inventories $1,327 $1,486 $1,663 $1,746 $1,833 $1,925 $2,021 $2,122
Financing receivables, net $2,303 $3,111 $3,661 $3,844 $3,844 $3,844 $3,844 $3,844 Deferred tax assets $2,126 $2,410 $2,294 $2,418 $2,539 $2,666 $2,799 $2,939 Other current assets $875 $941 $1,230 $1,292 $1,356 $1,424 $1,495 $1,570 Total current assets $51,421 $57,231 $61,933 $65,756 $68,135 $72,066 $74,760 $79,023 Property and equipment, net $3,941 $3,916 $3,402 $3,404 $3,469 $3,482 $3,439 $3,340 Financing receivables, net $2,614 $3,488 $3,585 $3,764 $3,952 $4,150 $4,358 $4,575 Goodwill $16,674 $16,818 $16,998 $16,998 $16,998 $16,998 $16,998 $16,998 Purchased intangible assets, net $3,274 $2,541 $1,959 $1,356 $936 $619 $437 $255
Other assets $3,206 $3,101 $3,882 $4,134 $4,403 $4,689 $4,994 $5,319
Total Assets $81,130 $87,095 $91,759 $95,412 $97,893 $102,004 $104,986 $109,509
Current liabili es:
Short-term debt $3,096 $588 $31 - - - - -
Accounts payable $895 $876 $859 $902 $979 $1,664 $1,111 $1,803
Income taxes payable $90 $120 $276 $191 $196 $204 $210 $219
Accrued compensa on $3,129 $3,163 $2,928 $3,074 $3,228 $3,390 $3,559 $3,737 Deferred revenue $7,664 $8,025 $8,852 $9,295 $9,759 $10,247 $10,760 $11,298 Other current liabili es $4,359 $4,734 $4,785 $5,152 $5,286 $5,508 $5,669 $5,913 Total current liabili es $19,233 $17,506 $17,731 $18,614 $19,448 $21,013 $21,309 $22,970 Long-term debt $12,188 $16,234 $16,297 $15,266 $15,663 $16,321 $16,798 $17,521 Income taxes payable $1,353 $1,191 $1,844 $1,908 $1,958 $2,040 $2,100 $2,190 Deferred revenue $3,419 $4,182 $4,028 $4,229 $4,441 $4,663 $4,896 $5,141
Other long-term liabili es $652 $723 $558 $763 $783 $816 $840 $876
Total liabili es $36,845 $39,836 $40,458 $40,781 $42,293 $44,853 $45,942 $48,698
Cisco shareholders' equity:
Common stock and addi onal paid-in $37,793 $38,648 $39,271 $40,866 $42,435 $43,975 $45,487 $46,970 Retained earnings $5,851 $7,284 $11,354 $12,906 $12,228 $12,357 $12,685 $12,965 Accumulated other comprehensive
income $623 $1,294 $661 $859 $938 $819 $872 $877
Total Cisco shareholders' equity $44,267 $47,226 $51,286 $54,631 $55,600 $57,151 $59,044 $60,811
Noncontrolling interests $18 $33 $15 - - - - -
Total equity $44,285 $47,259 $51,301 $54,631 $55,600 $57,151 $59,044 $60,811
Porter’s 5 Forces
Threat of New Entrants – Low
High technological base that requires investment in research and development Known competitors have evolved brand and economies of scales
Limited high skilled employees
Long-term agreements between major customers and established companies Large marketing costs
Supplier Power – Low
Cisco is the largest part of suppliers business Major companies operate in global supply chains
Most manufacturing is outsourced with contracts less than a year allowing for review of cost or performance. Supplier contracts for orders are for discreet time periods incase resources become available at lower costs.
Industry Competitors –High
Intense competition due to changes in technology
Companies are trying to offer solutions in all types of networking to customers Large amounts of effort to satisfy customer relationship to prevent switching Companies must invest in R&D while still keeping costs down
Foreign companies represent a threat from a low cost stand point.
Threat of Substitutes – High
Newly developed projects and services
Cisco is industry leader and adopt or develop new products to deal with similar technology Products among competition are functionally similar
Buyers Power – Medium
Multiple companies to choose give customers option regarding price Demand for more features fueled by technology changes
News
11/13 Q1 fiscal year 2013 results
Cisco had revenue growth of 6% during this quarter at net sales of $11.9 billion. Cisco had great growth in its service business at 12% growth and also had growth in service provider video 30%, Wireless 38%, Data Center 61% and Security 6%. Cisco had Earnings per share of $.39 and non GAAP EPS of $.48 which is a 12% increase year over year. Additionally Cisco was pleased with its growth in the Americas and APJC however it did decrease in EMEA.
11/7 A study done at the University of California by Dr. Michael Katz and Dr. Bryan Keating shows the potential of
combined video, data and voice systems through the internet known as Unified Communications. The study found that UC technology improves collaboration, boosts productivity and reduces travel costs.
10/17 Cisco’s partnership with Citrix, a company that specializes in desktop virtualization, networking, and cloud
computing technologies, announced they were extending their partnership into cloud networking, cloud
orchestration and mobile workstyles. This partnership aims to bring together the leading technologies in order to provide solutions as the industry transitions into a mobile-cloud era.
8/1 Cisco starts the SMARTnet Service that covers Unified Computing Systems and other data center products. The services goal is to reduce downtime through technical support, diagnostics and hardware coverage.
7/31 Cisco finishes its acquisition of NDS Group, a provider of video software and content security solutions that
allow for companies to deliver, secure, and monetize new video experiences. The acquisition will allow Cisco to improve its Videoscape program and expand its global customer base in emerging markets
How We Got Here
There are over 15000 publicly traded companies in the United States. Finding those companies that are undervalued can be a daunting task if done incorrectly. Using key financial data to screen and eliminate certain stocks makes it easier to find those that are undervalued. We feel that if a company cannot meet certain financial thresholds it can be labeled as a bad investment even before we research the company. We utilize screens because researching each and every company to find the best investment would be impossible.
Each one of our analyst had their own criteria they used for their screens, but all criteria’s followed the same basic guidelines. We utilized the online application Elroi: The
Electronic Analyst to run our screens and narrow the
number of stocks in our pool to around 30 stocks per screen. These select stocks represented what we felt were the best prospects to be undervalued by the market. We looked at companies with lower price to earnings multiples than their historic because that number may indicate that the stock maybe trading at a price that is lower than their earning potential. We liked stocks that pay dividends as it indicates that earnings were stable. We screened for lower debt/equity because companies with lower leverage are less exposed to market cyclicality than higher leveraged firms. We also screened for firms that were mid to large cap because they tend to align more with the objective of deep value.
We began narrowing down the group of thirty by looking at factors that peaked our interest. We looked at megatrends and economic factors that may impact the future earnings of these companies. We also looked at changes within management, shifts in strategic outlook or any other factors that the market may have misjudged in the pricing of the stock. We also looked at quantitative and qualitative factors that drove the value of these companies. Factors like investment in capital expenditures and dividend policy. Each one of our analyst picked their best investment from their particular screen.
Once the four stocks were picked each analyst had to pitch their stock to the group and explain why they believe that it was the best investment for the portfolio. The stocks were voted on and the best investment is chosen. For our group we selected Cisco.
