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Topic: Value Stocks

Value stocks: Cisco Systems keeps up to speed with faster computer networks

Cisco Systems

The most successful high-tech companies adapt quickly to changing conditions. For almost three decades, Cisco Systems has been a leader in hardware and software that links computer networks. As demand slows for many of its traditional switching and routing products, Cisco is moving decisively to upgrade its product line and establish a presence in cloud computing. It is also spending more than 12% of its revenue on research. With the shares trading at a modest multiple to projected earnings and yielding 3.1%, we view Cisco as a value stock with excellent potential.

This technology firm sees slowing demand for its traditional, but still highly successful, products. In response, it is shifting into related areas such as cloud computing.

We feel the company’s strong balance sheet and expertise will help it adapt, both through acquisitions and internal growth.

CISCO SYSTEMS INC. (Nasdaq symbol CSCO; www.cisco.com) is a leading maker of hardware and software that links and manages computer networks.


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Its hardware includes routers, as well as local area network and asynchronous transfer mode switches. The company is selling or discontinuing less profitable products as it shifts toward better-selling technology, such as computer security systems and software.

Cisco recently sold its set-top-box and cable-modem business for $600 million. It will also phase out its Invicta products, which store data on flash chips instead of disk drives.

In addition, the company is enhancing its expertise through acquisitions, including a $452.5-million deal for Lanscope, whose software analyzes network traffic to detect potential security threats. That lets users respond quickly, before intruders can steal sensitive data.

Cisco also recently agreed to buy U.K.-based Acano for $700 million. This company’s videoconferencing hardware and software helps users connect multiple video streams from a variety of servers and devices, including smartphones.

Value stocks: Research spending keeps Cisco products competitive with cheaper gear

Meanwhile, Cisco earned $3.0 billion in its fiscal 2016 first quarter, which ended October 24, 2015, up 7.9% from $2.8 billion a year earlier. Per-share profits rose 9.3%, to $0.59 from $0.54, on fewer shares outstanding. Revenue gained 3.6%, to $12.7 billion from $12.2 billion.

The company spent $1.56 billion (or 12.3% of its revenue) on research in the latest quarter, down 1.5% from $1.58 billion (or 12.9%). This spending has helped it update many of its products so they can better compete with cheaper software-based switching gear.

Cisco’s balance sheet remains strong: as of October 24, 2015, it held cash and investments of $59.1 billion, or $11.63 a share. Its long-term debt of $21.6 billion is a low 16% of its market cap.

The stock trades at just 11.8 times the company’s projected 2016 earnings of $2.28 a share. The $0.84 dividend yields 3.1%.

Recommendation in Stock Pickers Digest: BUY

For our advice on finding the best value stocks to invest in, read The 9 keys to finding undervalued stock picks.

 

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