Cisco's Good Valuation Earns the Company a Long Term "BUY"

Cisco CSCO is the leading manufacturer of networking equipment. Well-known for its innovative technology products and networking services Cisco stays ahead of competition. In spite of the slow growth in Japan and China, the company reported $2.3 billion net income in Q4 2013, increased by 21.05% compared to Q4 2012. Yet, the stock declined by almost 7% due to major layoffs (4,000 employees, nearly 5% of its workforce). However, Cisco still remains an attractive long-term investment opportunity.

The king of mobile data traffic business

Mobile data traffic business is growing rapidly. According to Cisco Visual Networking Index (VNI) Global Mobile Data Traffic Forecast Update, the global mobile data traffic grew 70% in 2012, reaching almost 12 times the size of the entire global Internet of 2000 (from 75 petabytes per month to 885 petabytes per month). Similarly, mobile video traffic grew 51%, while smartphones and tablets became the main devices for web browsing.By 2015, tablets are expected to grow over 10% of global mobile data traffic, while monthly global mobile data traffic is estimated to exceed 10 exabytes in 2017.

Cisco Expressway is Cisco’s ambitious project in the mobile data traffic business to capitalize on the latest trend towards the mobile Internet. With a focus on the protection of sensitive communications, Cisco has developed a new mobile data-centric gateway to enable secure collaboration using the office security framework on mobile devices.The Vice President of Marketing for the Cisco Collaboration Technology Group, PederUlander explains that with the increasing number of freelancing and contracting business, more and more corporate professionals need to communicate safely and accurately outside the office. This simply means that Android, iOS and BlackBerry BBRY devices can instantly connect with the use of TelePresence, Jaber and Jabber Guest, which run on mobile devices, without requiring passwords and log-in protocols.

The hugeadvantage of Cisco Expressway is that it flawlessly extends security policies to anyone accessing the network. Especially, after Cisco’s much-anticipated integration between WebEx and TelePresence videoconferencing last October, Cisco Systems is more involved in cloud computing by operating in a highly integrated collaboration environment. Gartner estimates that, up to 2015, the cloud market will exceed $177 billion. In my view, Cisco’s newly introduced network will gain confidenceby allowing professionals to safely communicate with each other and their customers using a reliable network. This will, ultimately, lead to an enhanced set of integrated communications services.

Cisco outperforms the industry

Source: Yahoo Finance

Cisco Systems is expected to report Q1 2014 earnings on 11/13/2013. Cisco has the largest market cap of all competitors, nearly $121 billion and greatly outperforms the industry. The company does also great in terms of operating margin with 0.24, outperforming all its peers. Yet, the most important indicator is Cisco’s 5-year projected PEG. Currently, it is estimated at 1.18 with an industry average of 3.11, which shows that the company has a great equity investment potential. Investor confidence is high, Cisco is expected to grow further in the future and this is very positive for the technology sector as a whole.

Cisco’s main competitors are Hewlett-Packard HPQ and Juniper Networks (NYSE: JNPR). With FlexCampus, HP Networking qualifies as one of the leading companies of LAN portfolio, gaining an increasing market share in building integrated data centers. Jupiter’s enterprise initiatives have placed the company as one of the leaders in the service provider routing space.

As forAlcatel-Lucent ALU, itstruggles to survive in the competitive landscape through massive job cuts. This allows Cisco to focus on expanding its customer base with clients that would probably leave Alcatel’s unstable environment for Cisco’s stable network infrastructure.

The bottom line

Cisco is transforming on multiple levels. In my view, Cisco will continue to grow and sell high margin products and services. On a year-to-year basis, the company has enjoyed a remarkable 32.76% increase in its share price (from $17 to $22.57). The consensus EPS forecast for Q1 2014 is expected $0.47, increased by 6.8% from the reported EPS $0.44 of Q1 2013. Higher earnings indicate higher cash flows, and this will allow Cisco to enter more strategic deals.

As the technology sector grows fast, Cisco becomes more and more attractive. In spite of massive layoffs CEO John Chambers thinks that jobs cuts are necessary as "realigning resources to look where our growth opportunities would be. The move was made because the market is moving so fast."

In conclusion, Cisco invests in the future and tries to stay ahead of competition by capitalizing on changing market realities and new opportunities before they actually become sector breaks. This is why Cisco earns a “buy” recommendation.