Is Cisco Still Too Cheap?

If an investor looks at Cisco (CSCO) chart, it appears the opportunity to buy Cisco was lost. Cisco shares bottomed at around $15, and are up over 25% from its 52-week low. Fundamentally, Cisco’s growth outlook is mixed. In its fiscal Q2, Cisco guidance for gross margins was light. The company expects some gross margin pressure because of a shift in the product mix. Cisco pointed specifically to the UCS server line, a low-margin product, as one reason to expect lighter margins.

Partnerships

To be more competitive and strategic, Cisco is looking to partner more closely with NetApp (NTAP), Red Hat (RHT), and Microsoft (MSFT). These are all EMC-VMWare (EMC) competitors. Cisco’s partnership with EMC and VMWare (VMW) is not going so well as of late.

Recent Developments

Cisco recently acquired a wi-fi equipment and security appliance vendor called Meraki for $1.2 billion. The acquisition gives Cisco cloud-based management software tools for equipment. This puts Cisco in more direct competition with Aruba (ARUN).

Taken from Kapitall’s Company Snapshot for Cisco:

In October 2012, Inmarsat Plc and Cisco Systems, Inc. announced the creation of a unique long-term alliance that will enable Inmarsat to deliver advanced services, from applications to business collaboration and video to multimedia content over Inmarsat’s new high-throughput satellite broadband network, Global Xpress (GX).

In October 2012, The University of Waterloo and Cisco Systems, Inc. announced an agreement to establish a Cisco Systems Research Chair in Smart Grid, which would promote, support, and lead research, development and innovation within the use of technologies and solutions for smart power grids.

In November 2012, Cisco Systems, Inc. and Ukrtransgas AC discussed joint strategic initiatives and signed a memorandum of understanding. The MoU stipulates a working group to be formed to study previous Cisco projects aimed at developing corporate telecommunications for gas transmission companies, designing a network platform for an advanced system of transporting gas, improving production, and introducing innovative equipment, as well as ready-made solutions to enable profitable business.

Earnings Guidance

In its webcast, Cisco forecast revenue to grow between 3.5% – 5.5%. Earnings will be $0.47 to $0.48 per share, while gross margins will be between 61% -62%.

Competitive Analysis

To get a sense of Cisco’s cheap valuation, it is useful to compare Cisco’s Price of Profitability (“POP”) to other companies, using Kapitall tools. Note the change in POP from 2011 – present:

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