CSCO stock analysis

Cisco Systems, Inc. (CSCO) stands to benefit from demographic and technology macro trends.

I view it as a good long-term investment but shares currently appear to be fully valued, if not slightly overvalued. I suggest investors be patient and wait for shares to retrace to more attractive valuation levels.

Summary

  • CSCO provides essential network architecture for business, government and the Internet of Things.
  • It should benefit from demographic and technology macro trends, such as a growing global middle class and 5G wireless.
  • Shift to more of a software and subscription-based offering strategy improves revenue predictability.
  • CSCO is a great company but the stock appears to fully fairly valued, if not slightly overvalued.

Introduction

In the “Final Thoughts’ section of my Cisco Systems, Inc. (CSCO) March 13, 2019 article I concluded with:

‘While I certainly like CSCO and the strategic direction it is taking I do not view this as an opportune time to acquire shares. I am of the opinion a broad market pullback is not out of the realm of possibility within the next 6 – 12 months and will patiently wait on the sidelines.’

With the recent release of Q3 and YTD results and Q4 guidance I now take a brief look at CSCO and provide my opinion on its valuation.

Q3 and YTD 2019 Financial Results and Q4 Guidance

CSCO’s results and Q4 guidance released May 15th can be found here and its accompanying Earnings Presentation can be found here.

Credit Ratings

Once again, there has been no change to CSCO’s credit ratings. Moody’s rates CSCO’s long-term debt A1 (top tier of the upper medium grade range) and S&P Global rates it AA- (bottom tier of the high grade range).

I have no reason to suspect CSCO will be unable to service its obligations.

Dividend and Dividend Yield

CSCO’s dividend and stock split history can be found here.

A more detailed review of these topics was covered in my March 13, 2019 article.

Valuation

In my March 13th article I indicated that CSCO generated $1.40 in diluted EPS in the first half of FY2019 and guidance for Q3 was $0.63 - $0.68. Using the $0.655 mid-point of that range and the same mid-point for Q4 I anticipated that CSCO would generate ~$2.71 in FY2019.

We now know that CSCO’s Q3 results exceeded guidance. Diluted Q3 GAAP EPS came in at $0.69/share and YTD GAAP EPS came in at $2.09. Q4 guidance is for GAAP EPS of $0.66 - $0.71.

With CSCO trading at $56.52 and full year GAAP EPS guidance of $2.75 - $2.80 we get a forward diluted PE range of ~20.19 - ~20.55. At the time of my March 13th article the forward diluted PE was ~19.41.

When I compare CSCO’s current valuation to historical levels on the basis of diluted EPS I am of the opinion that CSCO is currently richly valued.

In my opinion, a forward diluted PE of ~18 is reasonable. With full year GAAP EPS guidance of $2.75 - $2.80 we arrive at a price slightly below $50.

Let’s compare CSCO’s current valuation relative to historical valuation on the basis of non-GAAP EPS.

February 15, 2017 article - CSCO was trading at $32.82 and forward adjusted EPS guidance was ~$2.34 giving us a forward adjusted PE of ~14.

May 19, 2018 article - CSCO was trading at $43.21 and forward adjusted EPS guidance was ~$2.48 giving us a forward adjusted PE of ~17.42.

August 16, 2018 article - CSCO was trading at $45.38 and forward adjusted EPS guidance was ~$2.97 giving us a forward adjusted PE of ~15.28.

March 13, 2019 article – CSCO was trading at $52.59 and forward adjusted EPS guidance was ~$3.02 giving us a forward diluted PE of ~17.41. The mean adjusted diluted EPS guidance from 30 brokers was $3.07, however, thus giving us a forward adjusted diluted PE of ~17.13.

Current – CSCO has generated $2.26 in YTD non-GAAP EPS and Q4 guidance is $0.80 - $0.82 thus giving us full year projected non-GAAP EPS of $3.06 - $3.08; guidance from 29 brokers ranges from $3.07 - $3.11 with a mean of $3.08. Using $3.07 and with shares trading at $56.52 we get a forward adjusted PE of ~18.41.

FY2020 diluted adjusted EPS estimates from 29 analysts range from $3.26 to $3.51 with the mean being $3.41. Using the current $56.52 share price we get a forward adjusted diluted FY2020 PE of ~16.57.

Final Thoughts

When I initiated my CSCO position in 2010 I viewed shares as attractively valued. CSCO shares now, however, appear to fairly valued or slightly overvalued. I do not, therefore, intend to add to my current exposure at this stage. In fact, given my opinion on CSCO’s current valuation I have debated on whether to write covered calls.

I looked at writing $60 covered calls but the June premium is $0.16/share and the July premium is $0.43/share. I view these premiums as far too thin to warrant writing covered calls.

Looking at the August 16th $60 calls I see that I could generate ~$1.00/share before trading fees. While tempting I am going to pass. CSCO will be releasing Q4 and FY2019 results and FY2020 guidance right around the time the August options expire. I want to analyze FY2019 results and FY2020 guidance before initiating any option trades.

I think there will be opportunities before the end of 2019 to acquire CSCO shares where the valuation will be superior to the current level. I will, therefore, refrain from adding to my CSCO position at the current level.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long CSCO.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.