The beating that CSCO stock has taken in the past many months has been nothing short of amazing! Granted that other stocks like RIMM, NOK, TLAB are in the same boat but from my eyes, those declines are more understandable than Cisco. Below is some commentary from Hedge Fund quick pitch as featured in a recent issue of Hedge Fund wisdom.
Cisco is a global large-cap leader in the development and sale of internet networking products. It has +$40bn in sales, a $110bn market cap, 63% gross profit margin and 26% EBITDA margin. It is projected to grow top and bottom-line by 11% and 18% annually for the next three years, trades at 11.3x forward earnings (excluding net cash) and has a 10% free cashflow yield. It competes with companies like Juniper (JNPR), Aruba (ARUN), F5 (FFIV), NetGear (NTGR), Motorola (MOT), Avaya and Huawei.
David Tepper’s Appaloosa Management established an almost 4% new position in Cisco in 3Q, which is now even more interesting considering the company just reported very disappointing guidance and dropped close to 20% to its 52-week lows. So, investors currently have the opportunity to buy the stock at a lower cost-basis than Appaloosa’s (assuming they still own the position). The reasons investors were disappointed were weak projected growth and gross margins, driven primarily by softness in Europe, state government spending, and market share loss in the US set-top box business.
Cisco checks off all value-investor requirements:
- Cheap valuation (not paying for growth)
- Strong barriers to entry in a highly concentrated industry (where Cisco is the market leader)
- Solid long-term fundamentals (internet bandwidth usage increases exponentially with mobility and video)
- Fortress balance sheet ($25bn of net cash)
- High returns on invested capital (30% ROIC).
The criticism is that Cisco’s stock hasn’t really done much over a 10-year period, so it has somehow failed miserably to realize any value from very strong fundamentals. Also, there are increasing concerns that Cisco will lose market share and/or its gross margin will deteriorate. Finally, Cisco’s products and strategy are geared more towards integrated IT infrastructure, which is under attack by cloud computing.
Cisco is a global large-cap leader in the development and sale of internet networking products. It has +$40bn in sales, a $110bn market cap, 63% gross profit margin and 26% EBITDA margin. It is projected to grow top and bottom-line by 11% and 18% annually for the next three years, trades at 11.3x forward earnings (excluding net cash) and has a 10% free cashflow yield. It competes with companies like Juniper (JNPR), Aruba (ARUN), F5 (FFIV), NetGear (NTGR), Motorola (MOT), Avaya and Huawei.
David Tepper’s Appaloosa Management established an almost 4% new position in Cisco in 3Q, which is now even more interesting considering the company just reported very disappointing guidance and dropped close to 20% to its 52-week lows. So, investors currently have the opportunity to buy the stock at a lower cost-basis than Appaloosa’s (assuming they still own the position). The reasons investors were disappointed were weak projected growth and gross margins, driven primarily by softness in Europe, state government spending, and market share loss in the US set-top box business.
Cisco checks off all value-investor requirements:
- Cheap valuation (not paying for growth)
- Strong barriers to entry in a highly concentrated industry (where Cisco is the market leader)
- Solid long-term fundamentals (internet bandwidth usage increases exponentially with mobility and video)
- Fortress balance sheet ($25bn of net cash)
- High returns on invested capital (30% ROIC).
The criticism is that Cisco’s stock hasn’t really done much over a 10-year period, so it has somehow failed miserably to realize any value from very strong fundamentals. Also, there are increasing concerns that Cisco will lose market share and/or its gross margin will deteriorate. Finally, Cisco’s products and strategy are geared more towards integrated IT infrastructure, which is under attack by cloud computing.
