Looking at Cisco

At MSN Money, Michael Brush makes the case for Cisco (CSCO):

At $17.20 per share, the market doesn’t seem to be giving Cisco credit for its potential. If you subtract the $2.20 a share Cisco holds in cash, the stock trades for 13.6 times the $1.10 that Wall Street analysts project it will make in 2006.
Cisco looks cheap compared to the S&P 500. Investors are paying 14.7 times next year’s earnings for S&P 500 stocks, whose earnings are expected to grow 13.1% next year. Cisco should be able to book annual earnings growth in the 12% to 15% range for several years to come.
Cisco’s router and switch business — where it has more than a 70% share of the global market — accounts for about 60% of revenue. It’s growing in the 7% to 8% range a year, estimates Aaron Rakers, an A.G. Edwards analyst, who has a “buy” rating on Cisco and thinks the stock could climb 30% over the next 12 to 18 months.
Cisco has been using its huge cash hoard to either purchase or develop new technologies with its Advanced Technology Group. Here, the company focuses on lines of technology it believes can, in the near future, bring in at least $1 billion in annual sales. To put that in context, Cisco is expected to have revenue of $30 billion in 2006.

I just don’t see it. First, a growth rate of 12% to 15% seems overly optimistic to me. In my opinion, the business is too fragile to make such a prediction. Bear in mind that Cisco’s revenues in FY 2001 were higher than the next three years. Also, Cisco’s fiscal year ends in July, so that throws the comparisons off a bit. On top of that, we have the issue of accounting for options expenses. Cisco fought this regulation every step of the way. Me thinks they protested WAY too much. And if that isn’t enough, there’s the Scientific Atlanta (SFA) deal to absorb. I agree that Cisco looks cheap. Unfortunately, I think there are many good reasons why.

Posted by on January 4th, 2006 at 2:40 pm


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