Before getting into the details, we will take a step back to introduce the subject of today's analysis.
Cisco Systems, Inc., the
proud plumber of the Internet, has a
dominant role in markets for
enterprise networking products and services.
Cisco's earnings rose 27 percent in
fiscal 2010,
which ended in July, from $6.13 billion to $7.77 billion. Revenue
increased 11 percent, from $36.1 billion to $40.0 billion. Fiscal 2010
included a 53rd week.
The
market value
of the company has fallen from approximately $120 billion to under $100
million, on a fully diluted basis, in the last couple of months.
In 2011, Cisco initiated its
first cash dividend, $0.06 per share per quarter, to shareholders.
Cisco
categorizes its products as Routers, Switches, Advanced technologies,
and other. Switches generated the most Revenue in fiscal 2010, $13.6
billion, which was 42 percent of net product sales.
Revenue
from product sales was supplemented by $7.6 billion in Revenue from
services in fiscal 2010. Service revenue was 19 percent of total
Revenue in fiscal 2010.
The company's
business segments
for financial data reporting are defined by geographic region or
"theaters": United States and Canada, European Markets, Emerging
Markets, Asia Pacific, and Japan. The U.S./Canada segment provided 54.3
percent of fiscal 2010's Total Revenue.
Juniper Systems (
NASDAQ: JNPR) is usually considered Cisco's
most direct competitor in the enterprise market.
Cisco has long been a
serial acquirer, insatiably gobbling up companies of all sizes. In 2010, Cisco's two largest acquisitions were
Tandberg, for
$3.3 billion, and
Starent Networks, for $2.6 billion.
Cisco's Balance Sheet in January 2011 listed nearly $40 billion in
Cash and
Short-term Investments, which would seem to be an adequate war chest for further acquisitions. However,
much of this cash is believed to be overseas.
Gartner has predicted
$3.5 trillion will be spent
on Information Technology in 2011, up 5.1 percent from last year.
However, in a separate announcement, the well-known researcher was less
sanguine about spending on
Enterprise Information Technology, forecasting a modest
3.1 percent rise in 2011. Gartner commented that EIT spending growth would be "timid and at times lackluster" during the next five years.
Tepid industry spending would test Cisco's
frequent assertion that its revenue can expand over the long term at a rate between 12 and 17 percent per year.
In a major diversification effort, Cisco introduced in 2009 the
Unified Computing System for large
data centers. Since the UCS platform includes
computer servers, storage systems [from
EMC (
NYSE: EMC)], and networking gear, the UCS puts Cisco into
direct competition with heavyweights
Hewlett-Packard (
NYSE: HPQ),
IBM (
NYSE: IBM), and others. HP responded by
challenging Cisco on its home turf when it acquired
3Com.
Cisco has also branched out into
home entertainment, tablet computers (the
Cius),
video camcorders, and
smart grid technology. Cisco
might be satisfied if these products merely increases the demand for enterprise network infrastructure.
Now we turn to the
financial gauges. The latest quarterly results produced the following changes to the scores:
Current
and historical values for the financial metrics that determine the
gauge scores are listed below, with some brief commentary. Readers are
encouraged to verify these figures and calculate others as they see fit
using the filings available at the
SEC's web site and elsewhere.
| Cash Management | 29 Jan 2011 | 30 Oct 2010 | 23 Jan 2010 | 5-Yr Avg |
| Current Ratio | 2.8 | 2.8 | 3.5 | 2.7 |
| LTD to Equity | 26.6% | 27.3% | 36.6% | 23.9% |
| Debt/CFO (years) | 1.5 | 1.5 | 1.9 | 0.9 |
| Inventory/CGS (days) | 31.7 | 30.6 | 31.9 | 36.3 |
| Finished Goods/Inventory | 62.7% | 59.1% | 61.3% | 61.0% |
| Days of Sales Outstanding (days) | 38.5 | 36.5 | 32.6 | 34.1 |
| Working Capital/Revenue | 77.9% | 78.1% | 84.8% | 59.8% |
| Cash Conversion Cycle Time (days) | 51.0 | 47.5 | 44.8 | 48.2 |
| Gauge Score (0 to 25) | 9 | 11 | 9 | 13 |
The
Cash Management gauge lost two points, falling below the 10-point
threshold, primarily because of changes to the Inventory metrics.
The company's hoard of Cash and
Short-term Investments totaled $40.3 billion, a record high amount, on 29 January.
Working Capital -- the difference between
Current Assets and
Current Liabilities
-- is now $33.6 billion, which is also near a record high. Neither
acquisitions, nor share repurchases, have diminished this stockpile of
liquid funds.
Cisco has commented that tax considerations limit its ability to repatriate the earnings of overseas subsidiaries.
In
the first six months of the current fiscal year, Cisco spent $4.3
billion to repurchase 202 million of the company's shares, at an average
price of $21.27 per share. These purchases, which reduce shareholders'
equity, have not boosted the market price of the the shares.
More of Cisco's cash will be returned to investors when the company pays its
first cash dividend.
Long-term Debt, which got as high as $15.2 billion when Cisco issued
$5 billion in new debt last November,
is now down to $12.2 billion. In addition, Cisco has $3.1 billion in
obligations due to mature in the next year. Total debt remained steady
at 1.5 years of Cash Flow from Operations.
When measured in days of Cost of Goods Sold, Cisco's
Inventory
edged up one day in the most recent quarter. However, the Inventory
level is about the same as it was in the year-earlier quarter.
The
greater proportion of Finished Goods in the Inventory might be a
greater concern. The rise could be a sign sales were slower than the
company expected.
| Growth | 29 Jan 2011 | 30 Oct 2010 | 23 Jan 2010 | 5-Yr Avg |
| Revenue Growth | 19.2% | 20.0% | -10.2% | 6.3% |
| Revenue/Assets | 53.5% | 56.2% | 51.6% | 65.4% |
| Operating Profit Growth | -0.7% | 1.6% | 1.4% | 4.1% |
| CFO Growth | 31.7% | 19.4% | -36.2% | 0.2% |
| Net Income Growth | 24.9% | 38.3% | -19.0% | 2.2% |
| Gauge Score (0 to 25) | 15 | 17 | 0 | 9 |
Revenue,
CFO, and Net Income growth rates compare the last four quarters to the
four previous quarters. The Operating Profit rate is the annualized
rate of growth in Operating Profit after Taxes over the last 16
quarters.The Growth gauge experienced a minor setback after two quarters of significant increases.
Revenue
growth flattened out at 19 percent, nothing to sneeze at, on a
trailing-year basis. More worrisome was that Revenue in the January
2011 quarter was only 6 percent greater than in the quarter that ended
in January 2010.
Revenue as a percentage of total assets diminished after previous rises.
The
trailing-year growth rates for Cash Flow from Operation and Net Income
are robust, although the latter showed signs of moderating.
Operating
income, over a longer period, is not yet showing the kind of growth
rate one expects from a company with Cisco's ambitions.
| Profitability | 29 Jan 2011 | 30 Oct 2010 | 23 Jan 2010 | 5-Yr Avg |
| Operating Expense/Revenue | 78.1% | 76.3% | 77.1% | 75.8% |
| ROIC | 41.4% | 45.3% | 40.6% | 49.1% |
| Free Cash Flow/Invested Capital | 48.8% | 51.0% | 45.7% | 63.2% |
| Accrual Ratio | 1.8% | 10.5% | 13.9% | 10.2% |
| Gauge Score (0 to 25) | 17 | 15 | 12 | 14 |
The Profitability Gauge added to its healthy 15-point score. The gauge benefited from big decline in the
Accrual Ratio.
The increase in Operating Expenses per Revenue dollar (i.e., a lower Operating Margin) is a disappointment.
The
Return on Invested Capital and Free Cash Flow to Invested Capital
ratios both slipped slightly in the last quarter, but they remained more
robust than they were one year earlier.
| Value | 29 Jan 2011 | 30 Oct 2010 | 23 Jan 2010 | 5-Yr Avg |
| P/E | 15.4 | 16.4 | 22.2 | 20.2 |
| P/E vs. S&P 500 P/E | 1.0 | 1.1 | 1.2 | 1.2 |
| PEG | N/A | 10.3 | 15.9 | 4.1 |
| Price/Sales | 2.8 | 3.1 | 3.8 | 3.9 |
| Enterprise Value/Cash Flow (EV/CFO) | 8.8 | 10.2 | 13.9 | 11.3 |
| Gauge Score (0 to 25) | 13 | 11 | 1 | 9 |
| Share Price ($) | $20.93 | $22.86 | $22.97 | - |
The
Value gauge added to its score primarily because of the decline in the
share price. The shares have dropped further since the quarter ended.
The Price/Earnings multiple is no longer sky high. The PEG ratio is listed as negative because we calculate
The
Price-to-Sales Ratio and the EV/CFO ratio are also both relatively low
for Cisco, which is a positive factor for the Value gauge.
Cisco's
current share price today is near $17. At this price, the Value gauge
would soar to a very appealing 19 of the 25 possible points. Nine more
points would be tacked onto the Overall gauge score.
| Overall | 29 Jan 2011 | 30 Oct 2010 | 23 Jan 2010 | 5-Yr Avg |
| Gauge Score (0 to 100) | 54 | 51 | 23 | 45 |
Two
of the four category gauges improved during the January quarter, and
two weakened. None of the changes were greater than two points.
Since
the Value gauge is double-weighted, it was able to lift the Overall
score. The score is more than double what it was one year ago.
Today's
lower stock price would bring the score up to 63, a very good result.
However, the lower price also reflects investor concerns about the
potential for weaker growth.
Full disclosure: Long CSCO at time of writing.
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