Cisco Systems, Inc. (CSCO)

Equity
US
Technology

RISK

RETURN

Key risk factors

Negligible price volatility

Strong trading liquidity

Resilient to price shocks

Key return factors

Very strong margins and returns

Solid dividends

Somewhat favourable analyst view

Corporate actions & dividendsDividend of USD 0.400 with an ex-date of 05 Jul 2024.

Company profileCisco Systems, Inc. designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China. It provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products that are designed to work together to deliver networking capabilities, and transport and/or store data. The company also offers collaboration products comprising unified communications, Cisco TelePresence, and conferencing, as well as the Internet of Things and analytics software. In addition, it provides security products, such as network security, cloud and email security, identity and access management, advanced threat protection, and unified threat management products. Further, the company offers a range of service and support options for its customers, including technical support and advanced services. It serves businesses of various sizes, public institutions, governments, and service providers. The company sells its products and services directly, as well as through systems integrators, service providers, other resellers, and distributors. Cisco Systems, Inc. has strategic alliances with other companies. Cisco Systems, Inc. was incorporated in 1984 and is headquartered in San Jose, California.

Valuation: Slightly overvalued

Multiple

TTM

NTM

P/E

15.80

18.90

PEG

6.30

P/B

4.20

3.40

P/S

3.50

3.60

P/FCF

22.30

41.80

EV/EBITDA

13.40

12.10

Considering past and projected metrics, the stock is moderately 'expensive' compared to its peers. In particular, the stock is reasonably priced on P/E, of fair value on EV/EBITDA, and overvalued on P/FCF.

Performance: Mixed

Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Within the past six months, its performance has trailed this peer group's by 4ppts and its growth decelerated by 7ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Somewhat favourable

The average target price is 48 and suggests 0% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 70.6. This translates into 49% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 40.9. This is equivalent to 14% downside potential in the worst case.

Profitability: Very strong

RoE

Cisco Systems, Inc. reported a return on equity (RoE) of 17.7% in the last 12 months, down from 27.9% in FY22. The market consensus projects an RoE of 20.1% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 7.3% in the last 12 months, a decrease from 11.9% in FY22. The market analysts predict that RoA will be 9.3% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 10.6%, above the peers. The consensus estimate for FY24 for RoCE is 16.8%, again ahead of the peers.

Net margin

EBITDA margin

Historically, CSCO has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 20.3%, down from 21.3% in FY22. The company has reported good EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 26.9% in the last 12 months, a decline from 31.0% in FY22.

RoIC / WACC = 2.5(strong value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 2.5 in the past several years. This ratio implies a strong shareholder value creation.

Growth: Poor

Revenue

EBITDA

EPS

Free cash flow

CSCO reported revenue of USD 55 364mn in the last 12 months, down 3% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS fell 10% from FY23 to USD 2.99. Market expects EPS to reach USD 3.41 in FY24.Revenue has been growing very slowly over the past several years (middle negative), while slow revenue growth and a stable cost base have translated into weak EBITDA growth (negative-to-neutral). This all contributed to slow EPS growth (neutral). FCF has fallen rapidly, far faster than EBITDA. On the positive side, revenue dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been good and slightly above its peers. The company distributes most of its profit as dividends (payout ratio above 75%, a negative factor). It will not be easy to sustain such a high payout ratio. It may also indicate a company’s lack of profitable growth opportunities, which suggests doubtful prospects. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note robust profitability, solid return on capital, strong debt servicing capacity, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, excessive margin volatility, and inadequate interest coverage.

Volatility: Negligible

In normal market circumstances, CSCO is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to minimal.

Stress-test: Resilient

In highly turbulent market conditions, CSCO is not overly volatile. In other words, the stock will fall less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be low.

Selling difficulty: Very low

CSCO boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.