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Cisco: Internet Infrastructure King Still Reigns

by: Horacio Marquez June 30, 2008 | about stocks: CSCO / JNPR    

Horacio Marquez

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During the Internet boom in the latter part of the 1990s, Cisco Systems Inc. (CSCO) was the king of the “must-have” stocks, with shares of the maker of telecommunications-networking gear soaring 400% from June 1998 to March 2000.

At Friday’s close of $23.61, Cisco’s shares are down 69% from their all-time high of $77.31 and 31% from their 52-week high of $34.24, as most investors realize this will never be the great growth stock that it was a decade ago.

But that doesn’t mean investors should write off Cisco. Quite the opposite, in fact.

When it comes to Internet-infrastructure gear, Cisco remains the proverbial “800-pound gorilla,” the market leader and dominant-industry player.

Cisco recently reported strong earnings, meeting market expectations. Company Chief Executive Officer John Chambers - who is well known for “telling it like it is” - issued some rather cautious comments in conjunction with an upcoming performance guidance that was otherwise fairly strong.

Since then, Chambers has become much more confident in Cisco’s ability to achieve his long-term annual profit growth target of 12% to 17%. As the U.S. economy reaccelerates, technology-related spending by U.S. corporations - which accounts for about half of the capital outlays in this country - should be very robust for three key reasons:

First and foremost is that Cisco’s business, which enables computer-network and telecommunications-system connectivity, is a major way companies can improve productivity. 

And right now - despite the ongoing slowdown - U.S. companies are awash with cash, which is typically deployed in the year’s second half.

Finally, the United States actually lags other countries in terms of broadband-network deployment, and needs to close the gap in order to enhance its competitive position in the world markets.

Not that Cisco is a one-trick pony in terms of focusing only on the U.S. market. Indeed, Cisco is a global player and is enjoying very strong growth throughout the world’s emerging markets and in Asia, which includes recent major deals in China and in the left-for dead Japan. The company is even active in Europe, despite that region’s recent slowdown. Broadband is the name of the game and, as one analyst said, Cisco is the “Internet infrastructure king.”

From a financial standpoint, Cisco is virtually bulletproof. It has a $140 billion market cap and no debt. The company last year earned $7.33 billion on sales of $34.9 billion, dwarfing such rivals as Juniper Networks Inc. (JNPR), Nortel Networks Corp. (NT) and France’s Alcatel-Lucent (ADR: ALU).

This year, revenue will advance 13% and profits 10%. After that, investors expect profits to grow at a 15% annual clip - an alluringly brisk rate for a company as large as Cisco.

Investors don’t get many chances to invest in a terrific company at bargain prices. Earlier this month, while the NXTcomm 2008 global-telecom conference was underway in Las Vegas, Cisco’s shares dropped 6.5% - for no clear reason. Some analysts worry that telecom providers - the telephone and cable companies that, up to now, were the key growth drivers at Cisco and its sector compatriots - would go the way of the enterprise sector and cut back on their equipment outlays.

But those fears are overblown. Besides, rival Juniper Networks hasn’t taken market share from Cisco.

Action to Take: BUY.

Cisco has once again protected its crown.

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This article has 4 comments:

  •  
    Jun 30 08:09 AM
    Very well done perspective on CSCO - a core technology holding at an attractive valuation for long-term growth of capital !
    Reply
  •  
    Jun 30 11:20 AM
    CSCO is like Microsoft: dead money. Don't buy! Cisco's produces network infrastructure products: routers and switches. Their products are grossly overpriced and don't have any competitive edge on competitors. Sales are mostly pushed by excellent Cisco sales team, with IT departments having the old mantra: you don't get fired for buying Cisco (or Microsoft, or IBM). But that can only work for some time and doesn't promise growth.
    Reply
  •  
    Jul 01 12:55 AM
    I agree with the Muddling Investor. CSCO will never be an outstanding stock again and will go the route of the Palm. Their stock one year from now will be generally unchanged.

    You cant buy a put or call and expect to make any money.
    Reply
  •  
    Jul 02 07:19 PM
    Aside from this once upon a time history story what is the catalyst to pull money into the name this month?
    Reply
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