March 10, 2007
Cisco (CSCO) Undervalued
Cisco has been quite lately with the exception of coming to an agreement with apple over the copyrights and royalties from the name iPhone. Here is the recap: Cisco has had the copyrights to “iPhone” for it’s internet phone line since early 2000’s. Apple and Cisco were in negotiations for a joint agreement, an agreement could not be reached, when Apple needed to announce its iPhone product (January, this year). After announcing the product with Cisco’s copyright, Apple was forced to make an agreement with Cisco. Recently the two companies came to an undisclosed agreement. With all the leverage from Apple’s public announcement, Cisco must have received generous compensation. Since the fruits from the agreement are widely unknown, the effects have not been priced into Cisco’s stock. Thus, Cisco is currently undervalued.
Looking at the fundamentals, Cisco trades at a multiple of 25.17, exhibits a PEG of 1.22, and is 11% off its 52-week high of $28.99. A beta and short ratio of 1.88 and 0.7 respectively, indicates positive market sentiment and that growth by Cisco will be priced in quickly. As far as the long run, 68.40% is held by institutions; another 1.11% by insiders demonstrates a high probability of a solid long-term investment. Currently, debt to equity is .241 resolving limitations on future growth. A current ratio of 2.482 indicates a bulk of assets that will be moving in the next year relative to current liabilities, hence, Cisco is far from the “cash cow” segment of the company cycle. Future activity seems very high with $20.68B in cash on the balance sheet; this shows that Cisco will need to invest its cash in something, most likely an acquisition, within the next year.
Relative to competitors, Cisco has quarterly revenue growth of 27.30% (yoy), which is greater than its major competitors, as well as greater operating margins and net income. Combined with the fact that Cisco trades at a multiple lower than its three leading competitors while having the lowest PEG of the group, Cisco is undervalued and should be bought.
Posted by jwbir at March 10, 2007 11:17 PM