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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Cisco Systems

December 3rd 2010 Cisco Systems
Nasdaq Symbol: CSCO
Industry: Routers & Switches
Price as of 12/3: $19.07

A couple days into December and the major averages are performing well once again. Many stocks are pushing back toward their highs of the year. The techs continue to perform great with the Nasdaq up 14% year to date. However, not all big cap stocks are performing well. This week we'll feature the largest US market cap stock from 2000. The stock of the week is Cisco Systems. The heydays of the dot.com tech boom are long gone, but Cisco remains a dominant market leader. Cisco Systems reported disappointing earnings numbers at the beginning of November dropping 15% in one day. Ironically Cisco's best quarter is in the summer months and not the fourth quarter like most other tech stocks. Since Cisco reported their earnings, the stock has moved modestly lower and sideways. After the recent pullback, the stock now trades for 10 times earnings and provides an attractive entry point once again.
Back on November 10th, Cisco reported earnings of $1.9 billion, or 34 cents per share, up 8 percent from $1.8 billion, or 30 cents per share, a year ago. Stripping out unusual items, it would have earned 42 cents per share. Analysts expected 40 cents. Revenue rose 19 percent to $10.75 billion, just above the average forecast of $10.74 billion. But that was still below the $10.95 billion that analysts had predicted for the quarter in August, before the company lowered expectations. Cisco's outlook for the quarter that ends in January also fell short of expectations. It expects revenue growth over the same quarter a year ago of 3 percent to 5 percent. That works out to between $10.1 billion and $10.3 billion, while analysts expected $11.08 billion. The main culprit for the weak forecast is coming from less government spending. CEO John Chambers indicated they're seeing spending by governments around the world contract. Some analysts are worried the latest shortfall in Cisco's revenue projections may have more to do with smaller competitors eroding its dominant market position. Whatever the reason, it's not good news for Cisco in the short term. Long term, however, Cisco is still well positioned and will once again out flank their competitors.
AS mentioned, with the recent pull back Cisco System's valuation remains attractive. Currently the stock trades for 10 times earnings, 2.5 times sales, and 2.4 times book value. The company has $23 billion net of long term debt and intends on paying out a dividend next year for the first time in company history. Standpoint Research upgraded Cisco following the earnings report with a buy rating and a $24 price target. The analyst went on to say this was the third time in seven years that he's seen an opportunity buy Cisco based on valuation.
While there seems to be no short term catalysts to get the stock moving, Cisco is attractively valued for long term investors.