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Cisco Systems, Inc. (NASDAQ:CSCO) has long been one of the key bellwether stocks not only for the technology sector, but for the global business climate. Cisco offers a huge variety of products modern businesses cannot do without and sells them all over the world. To many investors Cisco is a classic canary in the coal mine as any hint of reluctance with spending on Cisco products is thought to be a sure sign businesses are battening down the hatches in anticipation of rough seas ahead. The stock was trading around $19 as we tiptoed into the waters of the trading year 2012 and is now down in the $17s today. Is it time to buy or stay away?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.
C = Catalyst for a Stock’s Movement
For tech companies like Cisco a catalytic event is often a new product announcement; a major technological innovation; or an acquisition. Cisco recently announced a major enhancement to its Unified Computing System (UCS), a data center server system experts call revolutionary. Market participants yawned. Changes to one of the company’s core consumer products, Cisco Cloud Connect, met with a similar fate. What the market cares about is Europe. There are three major players spewing fear and panic into global equities markets today – the US, China, and Europe. Europe is the linchpin. They are China’s biggest trading partner, and although European business accounts for about 20% of Cisco’s revenue, the company has of its own accord warned that concerns over the European debt crisis are inhibiting enterprise spending across the board. Hard evidence of real progress on long term solutions in Europe should be a major catalyst for Cisco’s (NASDAQ:CSCO) stock, along with equities markets as a whole. Short of that, not even an announcement of a Cisco product that cured cancer will propel this stock.
H = High Quality Pipeline
In the last 12 months Cisco spent $5.6 Billion on research and development, ranking them in the top ten of American corporate R & D spending. They currently have market share leadership in every segment they serve and they serve them all. They literally provide services to all types of industries all over the world. The problem for the ordinary retail investor like you and me is understanding those high quality products and product enhancements in the pipeline.
If you are a believer in investing in what you know or can understand, does that mean Cisco (NASDAQ:CSCO) is only for the technophiles amongst us? With apologies to Warren Buffet and Peter Lynch, absolutely not. It doesn’t take a tech geek to learn the world is moving to the cloud, and with an investment of a little time you can learn the cloud is like a hard drive in the sky. The cloud allows consumers and companies to shed themselves of storage facilities for data and application programs.
Right now Cisco has about a 77% market share of global enterprise routing. Routing is the moving of information and Cisco (NASDAQ:CSCO) designs and sells every imaginable product to move information along the Internet. Check for yourself and you will see they have little major competition and although the Bears point to those little fish nibbling away at Cisco’s market share, they ignore the fact Cisco is using its clout and technological capability to expand into adjacent markets, like smart grid applications.
For those who say the pipeline enhancements of existing network infrastructure products are aimed at a vanishing market, we say Cisco (NASDAQ:CSCO) is moving to the cloud as rapidly as anyone else. There are around 50 public cloud providers right now and 70% of them already use Cisco products. That’s how you evaluate a product pipeline without full technical understanding – the dogs are eating it!
E = Equity to Debt Ratio is Close to Zero
Companies with little or no debt are better positioned to withstand global economic shocks than companies with high debt. Cisco’s debt to equity ratio is .32, or 32%. While that is a little high, a company’s debt position needs to be considered in conjunction with its cash position. Cisco has long term debt as of the most recent quarter (MRQ) of $16.4 Billion with $48.4 Billion cash on hand. Not too shabby.
A = A Level Management Runs the Company
Cisco’s John Chambers is one of those CEO’s whose words act as market catalysts. When Chambers warns, the Tech Sector and the market as a whole can suffer along with Cisco’s share price. By all accounts, Chambers is getting high marks for restructuring and reinventing Cisco (NASDAQ:CSCO).
E = Earnings are Increasing Quarter over Quarter
Cisco’s earnings per share over the last five quarters doesn’t fully meet this standard, but considering the economic climate in which we find ourselves, the numbers do not reflect a massive drop-off. Earnings per share for the most recent quarter were $0.33 with prior quarters at $0.22, #0.33, $0.42, and $0.43.
T = Trends Support the Industry in which the Company Operates
The Internet has changed the way we work, live, play, and learn. (That is Cisco’s mission statement.) Revolutionary technologies are coming in every aspect of our lives, from mobile payment systems, to TV Everywhere, to Voice Recognition, and on and on. Think of it this way. Everytime you push a button or touch the screen on one of your digital devices, marvelous things happen. Cisco Systems is behind those miracles.
Considering its market dominance, technological capability, and involvement in an industry trending exponentially upward, it is hard to imagine anyone not looking at Cisco (NASDAQ:CSCO) as a long term buy right now. When you think about it, what they do is more far-reaching than market darling Apple (NASDAQ:AAPL). But therein may lay the problem for investors. We can all understand the iPad, but a revolutionary quadruple blade double dingus switcher is not all that exciting. You decide…
Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.
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