Known as the worldwide leader in networking equipment, Cisco Systems (CSCO) designs and sells a broad range of technologies that help their customers provide a highly secure and intelligent platform for digital business, notes Zach Jonson, CFA and senior portfolio manager at Stack Financial Management.
Over the last few years, CSCO has set out to reinvent IT architectures to help customers simplify the ever-changing technology landscape. In doing so, they are focusing on six core elements: applications, data, security, cloud, infrastructure, and teams.
These six core elements add value as more and more business migrate from an internal network structure to private, hybrid, and even multi-cloud environments.
While the internal business transition has gone well, CSCO has seen a decline in overall demand due to uncertainty created by global macroeconomic weakness. However, we feel this near-term decline presents an excellent opportunity for investors to own a company that is well positioned for future growth.
As the dominant supplier of routers, switches, and data center products, CSCO maintains a strong core business as a networking vendor. In the meantime, CSCO has shifted their focus towards innovation and becoming a more software-centric firm.
In fact, the company aims to deliver approximately 50% of sales from software and services by 2020. This shift towards a recurring stream of revenue will help insulate CSCO from changes in the macroeconomic environment.
From a valuation standpoint, CSCO trades at a forward P/E of approximately 14.5 times which is right in line with long-term historical averages. While the communications equipment industry tends to trade at a discount to the broad Information Technology sector, we believe CSCO’s high quality balance sheet and 3% dividend yield justifies a much higher multiple.
At Stack Financial Management, we analyze stocks using four key factors: Value, Growth, Quality, and Technical. Utilizing these four components, we create a proprietary score which ranks stocks on a relative basis. Cisco's ranks high due to its attractive value characteristics, strong quality score, and forward growth prospects.
While the Technology sector as a whole has been dominated by high growth internet-based names, CSCO represents a true conservative growth opportunity trading at a discount to its intrinsic value. (Disclosure: Clients and individuals associated with Stack Financial Management hold positions in and may, from time to time, make purchases or sales of this security.)
