Recent Buy – CSCO

Tuesday was a busy day for me this week, having entered a new position in GILD (increasing my total # of positions to 12) and adding to my position in CSCO at a price that was “in the green” on my watchlist.

As part of my continuing Brexit sale celebration, on 6/28/16, I purchased 100 shares of Cisco Systems, Inc.(CSCO) on 6/28/16 for $27.59 per share, for a total purchase price of $2,759.50.

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Cisco & networking 101

Cisco Logo

Interesting fact: The name Cisco is derived from the name “San Francisco” – and the logo is designed to depict the two towers of the golden gate bridge.

Cisco Systems is the largest networking company in the world.

They sell the devices – or hardware – that lets you connect to the Internet.

You already own most of these devices, Cisco or not, since by definition you’re reading this via the magic of the Internet.

I’m sure these devices look familiar to you, although you may not have any idea what each one actually does, since they all sort of look the same:

Modem – This is a small box that magically allows multiple computers to access the Internet. It usually crashes out on you at the worst time. Then you have to unlplug it and replug it in, which by the way solves about 95% of all computing related problems..

cisco_cable_modem

Router – Think of this like the traffic director of the network. It sends data from the modem to various devices connected to your home or work network. Routers also keep your computer safe from hackers or other bad guysthrough “firewalls.”

Cisco Router

Switch-  A little less well known, a switch provides additional ports, expanding the capability of the router. Forwards traffic within a single network that connects networked devices together in a single network.

Cisco small business SG300-28 28-port Gigabit Ethernet rackmount switch and its internals

Phone –  This is a device that sits on your desk and you hope never rings so your Facebook time isn’t interrupted.

330px-Cisco7960G

The below diagram illustrates how they all work together in one harmonious work or home network:

networkingguidelines-ss-ideal1

Technology is magic, no?

Switches and routers account for nearly two thirds of Cisco’s product revenue. The remaining portion comes from a collection of faster-growing adjacent market segments such as wireless, security, collaboration, unified communications and data center products.

Of note: In late March 2000, at the height of the dot-com bubble, Cisco became the most valuable company in the world, with a market cap of more than $500 Bn. Quite remarkable when you think about it.

Currently their market cap is about $142 billion, while quite a bit smaller in the last 16 years, but this still makes them one of the world’s most valuable companies.

The future

These things that Cisco does – helping to facilitate connections, and keep users safe – will only continue, although the technology needed will of course need to evolve.

Cisco has been investing and has been quite acquisitive of late, to position themselves to win in this area against IoT competitors IBM and Oracle.

Two areas where Cisco is focused here is in cloud and Internet of Things (IoT).

Think of your refrigerator connecting to the Internet – it could tell you when you’re out of milk. Or your entire home. Or your toothbrush. How cool is that?

Better yet, the emerging IoT market is estimated to be $19 Trillion dollars.

Quantiative measures

Revenue for 3Q16  totaled $12 billion up 3% from 3Q15. Net income non-GAAP was $2.9 billion, an increase of 3% YoY, and EPS stood at $0.57, a growth of 6% compared to 3Q15. On a GAAP basis, total gross margin rose to 64.3%, the best result since 2010.

In the third quarter, Cisco paid a cash dividend of $0.26 per common share, up 23.8% from the previous quarter. The company has a good dividend history with a yield above 3% over the last 5 years. Presently, the dividend yield has risen to around 3.7%. The forecast of future dividends is very favorable given that Cisco’s results are sustained with great cash flow generation.

Cisco has an incredible $60.4 Billion in cash and cash equivalents at the end of 2Q16. This gives it tremendous financial flexibility to pursue value creating acquisitions and/ or significantly increase the dividend.

Based on a discounted cash flow model and a 10.1% average cost of capital to discount future cash flows, Cisco has a range of potentials that put a fair market value of $30-$44, above my purchase price of $27.59

Risks

  • The industry is characterized by low barriers to entry, rapid technology change, and pricing competition.
  • The emergence of Chinese network equipment firms like Huawei will impact revenue and margins in China and EMEA
  • The continuing move toward cloud-based solutions could cause a slowdown in its traditional switching and routing markets

Conclusion

I like where Cisco is going and think with their investments & acquisitions they are positioned well for the transition to cloud and IoT.

Morningstar rates CSCO at 5/5 stars, with a $124 per share fair value estimate.

According to Zack’s, 15 analysts rate CSCO as a strong buy, 2 as a buy, 1 as a hold, and 1 as a strong sell.

This purchase will add $104 to my annual dividend income, based on a $0.26 quarterly dividend.

Thanks for reading.

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