Tag Archives: CSCO

Cisco Shines: What To Buy Next?

Posted on by Nirav
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About four months ago I made the case for going long Cisco. At the time, Google shares (GOOG) had popped 20%, and I was looking for a new company to invest in.

In the middle of July Cisco (CSCO) was trading at $15.66.  From a fundamental perspective, Cisco was cheap – selling at less than 10 times free cash flow, and had just started paying a 1.5% dividend. However, the market was discounting the stock price  because they didn’t believe the CEO, John Chambers, could revitalize the aging tech giant.

But regardless of the management, based on just the numbers, the stock was too cheap too pass up.

And numbers don’t lie.

Yesterday, Cisco announced stellar results. It seems that growth is picking up.

Since that last post, shares of Cisco are up almost 20%, at $18.61.

Cisco isn’t the only company doing well this economic environment.

Large cap blue-chip companies like Intel (INTC), Microsoft (MSFT), Walmart (WMT), Johnson &  Johnson (JNJ) are also doing well.  Even my old favorite Vodafone (VOD) which I bought over a year ago is doing well. The share price, currently at $28.39, is up nearly 23% from my purchase, and it currently yields 6.75%.

So what stock is worth buying today?

Believe it or not, it’s Warren Buffet’s Berkshire Hathaway (BRK-A or BRK-B).

Buffett recently announced that Berkshire would buy back shares below 1.1 times the book value. The world’s best value investor definitely recognizes value in his company stock price and has effectively put a floor underneath the stock.

Currently trading at a Price/Book  of 1.15,  the stock is close to that floor.

Let’s look at the B shares, or the baby Berkshires (BRK-B), which currently trade at $76.

Buffett’s 1.1x of book value puts the stock price floor at $72.69. But how much is the stock actually worth?

This is actually very simple to calculate.

The value of the publicly-traded securities owned by Berkshire is $63.66. The rest of the companies made $4.8 in earnings. These companies are worth about 10 times the earnings or another $48.

Add the $48 to the $63.66 and we get $111.66.

So buying Berkshire today means we have a floor at 5% below today’s price, and an upside of 31%.

Disclosure: I’m Long CSCO, BRK-B, MSFT, INTC, WMT and JNJ

Is It Time To Buy Cisco?

Posted on by Nirav
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Last week, search engine giant, Google (GOOG) jumped 15% in one day.

About six weeks ago, I wrote a post stating that Google was undervalued by 33%, and worth buying at around $500 per share.

Since then it’s jumped to $600, a whopping 20% jump, more if managed to get in at the low point. Quite a strong move for a large cap stock.

I still think the story for Google is strong, but if I didn’t already own it, I wouldn’t necessarily buy it today. Instead, I’d look for another cheap stock, something a little more boring.

As I wrote about in a previous post on investing in boring stocks, I prefer unloved, boring stocks with no growth prospects over exciting, glamor stocks. Incidentally, the stock I mentioned in that post, Johnson & Johnson (JNJ), is up over 10% in the past four months.

One of the stocks I’d consider is Cisco (CSCO).

This tech giant has lost its luster, with the stock price having gone nowhere for the past ten years.

I blame the poor leadership of the CEO, John Chambers, for the stocks performance. But at today’s prices, it probably doesn’t matter how incompetent the management is.

Cisco currently trades for $15.66 with a newly introduced dividend yield of 1.50%. It trades for a P/E of 12.2 but more importantly it trades for a P/FCF of only 9.2.

FCF or free-cash-flow is one of my favorite metrics when valuing stocks. It’s the cash left over after all the expenses have been paid out, and capital expenditures have been made. Unlike earnings, free-cash-flow is very hard to manipulate. Over the past decade, even though Cisco’s share price has stagnanted, the free-cash-flow has more than doubled from $4.1 billion to $9.2 billion.

For a stable, profitable market leader like Cisco, ten times free-cash-flow is a great deal. As Warren Buffett indicated in his purchase of Lubrizol, it’s okay to pay 20 times free-cash-flow for a great company.

Cisco also has an incredibly strong balance sheet, with about $40 billion in cash or $7.80 per share in cash – that’s almost half of it’s stock value.

Even though Cisco faces increasing competition and has a penchant for wasting money on acquistions that don’t seem to make any sense, it still has a wide economic moat. Cisco makes devices that move internet traffic. And the amount of internet traffic is increasing every day.

It’s only a matter of time before Cisco becomes a $25 stock again.

Disclaimer: I’m long Cisco.