Cisco Systems: Investing in intelligent networks

The networking giant is reinvigorating its business with a focus on virtualization and cloud computing.

By TheStockAdvisors Mar 20, 2012 10:45AM

By Richard Moroney, Dow Theory Forecasts

Cisco Systems (CSCO) pushed the reset button in the fiscal year that began in August. The networking giant has sharpened its focus on cost cuts and efficiency improvements in hopes of reinvigorating its business.

Over the past few years, competitors have nibbled away at Cisco's markets, slowing the company's growth. But it is now emphasizing new products that will keep it relevant.

In the past 12 months, Cisco has invested more than $5.6 billion in research and development. And it is making acquisitions again.

In the January quarter, operating profit margins widened to 23.7% from 16.2%, reversing a five-quarter trend of year-over-year declines. In the six months ended in January, Cisco earned $0.90 per share, up nearly 13%.

Yet the shares trade at just 12 times trailing earnings, a discount of more than 30% to both Cisco's computer-networking peers and its three-year average price-to-earnings ratio.

Cisco also trades at a discount of at least 15% to its three- and five- year average price-to-sales, price-to-book and price-to-cash flow ratios.

Cisco sees the future in intelligent networks that allow computers to communicate with each other effortlessly and deploy processing power where it is needed most.

Mobile data traffic doubled last year, and Cisco expects traffic to top 130 billion gigabytes in 2016, up from about 7 billion in 2011.

Cisco's research efforts focus on two areas key to both traditional business networks and mobile devices: virtualization and the cloud.

Virtualization aggregates computing resources into a seamless network, allowing users to transfer data and use software applications anywhere from a handheld device to the central server.

The cloud is an Internet delivery system that pools network resources, reducing congestion when multiple users try to use files and programs stored on a single computer.

The consensus projects fairly modest per-share-profit growth of 13% in fiscal 2012 and 8% in fiscal 2013, though the targets are rising.

Partly because of the company's commitment to stock buybacks (share count has declined 8% over the past three years) and dividends (initiated in early 2011 and raised 33% last month), we rate the stock a "long-term buy."

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