Cisco has had its share of problems, many self-inflicted. I have also been pretty wrong about Cisco (both the stock and the company). But I still have a pretty decent gain in my (small) holding., Mostly because I bought a bunch when it went to $15. I knew things weren’t THAT bad.
Cisco is now at $21 and I took a quick look at valuation.
- Cisco is earning about $2 a share, which I think is pretty sustainable.
- At $21, the simple PE is 10x.
- But Cisco has $9.02 a share in cash. Subtracting that cash out, the operating business is only trading at about $12 a share (21 minus $9).
- At $12 generating the same $2 in earnings, the operating business is trading at a 6x PE
- Of course, a lot of that cash is trapped overseas. If Cisco handed it back to shareholders, they would have to pay US tax. So lets take out 35%, which leaves you with about $5.80 a share. Although we can hope for a corporate tax amnesty in the near future.
- That puts the operating business at a 7.7x PE.
- There are some other wrinkles. Cisco does have debt. It probably wont hand back all that cash. It will probably blow some of it on dumb M&A. Happily I am a just a blogger and don’t have to go through that tedious stuff.
So lets call it a 6x-8x PE on the core business. That makes Cisco pretty darn cheap.
- It has a lot of problems, but it is solidly profitable and deeply entrenched in its core markets. John Chambers is probably not the guy to solve Cisco’s current problems, but the problems ARE solvable. And Chambers is leaving soon.
- In the meantime, you are getting a 3% cash dividend to hang around. Better than what you’d get from cash.
- What’s the catalyst? This question always used to piss me off. I have no idea. No-one does. The bet is ONLY that “a” catalyst will eventually come. An IT investment up-cycle? Better management moves? An overseas tax amnesty and special dividend? All of the above? You will know it when you see the stock respond . But then it will be too late to own it.
I am not buying more. Mostly because I have other uses for my cash and m trying to pare down individual stock bets. But I am not selling. Just betting on a catalyst somewhere down the line. And collecting 3% in the meantime.
