Cisco stock looks ready to saddle up and ride
Cisco Systems Inc. (CSCO-$15.52) was founded in 1984 by Sandra Lerner and Leonard Bosack, a husband-and-wife team from Stanford University.
Dear Mr. Berko:
In April 2009, I bought 300 shares of Cisco at $17. And as you can see, it is still $17. My broker has advised me to sell, because he believes the stock could fall to $13 by the end of this year. I wrote you about a year ago when Cisco was $24, and you told me to sell. Obviously, I didn’t. Would you advise me to sell the stock today?
N.E., Durham, N.C.
Dear N.E.:
Cisco Systems Inc. (CSCO-$15.52) was founded in 1984 by Sandra Lerner and Leonard Bosack, a husband-and-wife team from Stanford University. It’s believed they named the company Cisco because they were enamored of the Cisco Kid, a character featured in a 1907 short story by O. Henry and later popularized by TV, movies and comic books.
CSCO is a $44 billion provider of Internet Protocol-based networking products for transporting data, video and voice from point A to local area networks, metropolitan-area networks and wide-area networks around the globe. CSCO was one of the hottest stocks of the ’90s, splitting nine times between 1990 and 2000, when revenues rose to $7.1 billion and earnings reached 65 cents a share. So 100 shares purchased at $25 in 1990 morphed into 28,800 shares in 2000 worth $2.36 million. That year, CSCO was $82 a share – there was gold dust in the air, it was Christmas every day, and widows, orphans, even the homeless ran after the bandwagon like a Klondike stampede.
Fast-forward to 2011. CSCO’s revenues grew sixfold to $44 billion, earnings and book value tripled, but shares tumbled down to $17. How is it possible that Cisco’s stock value limped from $82 to $17 while revenues grew sixfold and earnings and book value more than tripled? And isn’t it amazing that in the 10 years since CSCO traded at $82, not even Merrill Lynch, nor Lehman Bros., Goldman Sachs, Dean Witter, Morgan Stanley or J.P. Morgan posted a “sell” opinion on CSCO? Do you know why?
Meanwhile, tell your brokester to stick a carrot in his ear, both ears if he has two carrots. Yep, this 800-pound monster is in the trash bin and trades at a cheap 11 times next year’s earnings. CSCO has $8 in cash per share and gushes somewhere between $6 billion and $8 billion in free cash flow annually.
Though income will fall 7 percent from 2010 due to one-time occurrences, trusted analysts believe that in 2012 CSCO will benefit from growing strength in data-center devices (storage and switching), plus video conferencing and collaborative products. The long-term demand for CSCO’s carrier routers remains strong. The company’s share of the Ethernet continues to grow. Finally, Unified Computing System servers show signs of early success and are certain to expand CSCO’s footprint in its data centers.
CSCO shares are now trading at one of its lowest price-to-earnings multiples in a generation, driven down (temporarily) by earnings concerns. But earnings for 2012 are expected to rise 15 percent to $1.45 per share on a 10 percent increase in revenues to $49 billion. And the 25-cent dividend yielding 1.6 percent should be raised to 36 cents next year to yield 2.3 percent.
I’d buy more CSCO, because I think the stock could trade around the $21 to $23 level in the next 12 to 18 months.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or email him at malber@adelphia.net. ©2011 Creators.com
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