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Cisco Valuation So 'Silly' It's Time to Buy - JMP

by: Eric Savitz October 13, 2008 | about stocks: CSCO    

Eric Savitz

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Time to buy Cisco (CSCO), according to JMP Research analyst Samuel Wilson.

Wilson today upped his rating on Cisco to Market Outperform from Market Perform, setting a $22 price target. He notes that the stock recently hit a series of 52-week lows, as sentiment for tech stock deteriorated amid concerns about IT spending. But he contends that Cisco should be a long-term winner from the crisis, based on “its fortress balance sheet,” with nearly $20 billion in net cash, or about 20% of its market cap, “dominant market position and strong execution skills.” He notes that Cisco knows how to deal with a downturn, having navigated the dotcom/telecom meltdown of the early 1990s. Wilson adds that Cisco has historically gained share during downturns. And he says that the company’s valuation has reached “very compelling levels.”

In fact, he contends the stock’s valuation has become “silly.”

“Throwing out all forward valuation methods as unreliable given the potential for wild swings in earnings or sales assumptions, we are focusing only on trailing valuation metrics,” he writes. He notes that at the recent price of $17.23, the stock has a free cash yield of 10.5%. And he says that using his DCF model, the current stock price implies free cash flow declines 0.5% a year compounded or the next ten years. That outcome, he says, is simply not likely.

Cisco today is up $1.03, or 5.98%, to $18.26.

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This article has 6 comments:

  •  
    Oct 13 12:12 PM
    What? Cisco has been going essentially nowhere for 5 years. And now, in the middle og a huge downturn, the analysts suddenly thinks Cco is a screaming buy, by looking backward?

    I think not.
    Reply
  •  
    Oct 13 12:47 PM
    A P/E of 14 for a mature company like Cisco is not silly. In fact, it's a bit high, compared to GE trading at a P/E under 10 and NOK under 9 and CAT under 8.

    Given the current valuations of its peers, why wouldn't it drop another 30%? And another thing...if you account for that 20% cash and give it back to the shareholders, the P/E is more like 17. What a bargain.
    Reply
  •  
    Oct 14 10:58 AM
    An analyst that writes a decent article. Yes Cisco is a good buy now. Most of the analyst today write articles to benefit their own portfolio.
    Reply
  •  
    Oct 14 11:00 AM
    i m therom99
    Reply
  •  
    Oct 15 08:57 AM
    You call that research? Eric, you are simply quoting what another research firm says. What kind of work are you doing?

    I don't think CSCO would agree with your sentiment. This week the company will announce layoffs that are quietly underway. If there was some near term optimism, CSCO wouldn't be making cuts. On the other hand, the share price may rise in response to cutting expenses.

    Reply
  •  
    Oct 23 01:10 AM
    During the tech bust, Cisco stock lost 90% its value. If you bought it after it dropped 80%, you lost another 50% (from 20% to 10% of peak value) by the bottom.

    Any price can go up or down, at least in the short term.
    Reply
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