RD's Picks

Checked my e-mail after posting my weekly update and had one from Ken Kam asking those of us that had CSCO in our SLO portfolios for some more information on why we like the stock. Here goes, hopefully a little Maker's Mark (Scotch and Irish whiskey is good, but whiskey was perfected in Kentucky) won't mess up my thinking too much. Ken's questions in italics.

What is the conventional wisdom that explains the current valuation of the stock?

Conventional wisdom is closing the valuation gap in CSCO. After the earnings report on the 7th, the market is starting to believe John Chambers when he says the company can still grow earnings. My first blog ever was "Cisco on sale" at the Motley Fool (hope you don't mind mentioning a competitor) where I described why I thought the market had significantly undervalued CSCO after the May earnings report. At that time, I thought fair value for CSCO was 35-40 based on PE and PEG valuations compared to the S&P. The market has closed some of that valuation gap.

Why is the conventional wisdom wrong?

The conventional wisdom was wrong because the market believed a company the size of Cisco couldn't grow earnings at double-digit rates for much longer. The company seems to be playing with an open hand here; discounted cash flow and valuation comparisons all tell me CSCO should be headed to 35+ by year-end barring something completely trashing their market space. IMHO, the most significant words in the CSCO conference call were the CEO saying this is the best global business environment he's ever seen - read that again, listen to the call, read the transcript, this might be one of the most significant business statements of the year - the best global business environment John Chambers has ever seen.
The next most significant piece of CSCO is that huge cash pile. That cash may be one of the most undervalued assets in existence. This was mentioned in the conference call, but with credit markets unraveling cash will be king. CSCO has one of the biggest net cash hoards in existence. I don't know how they'll deploy it but the options are all good - acquisitions, R&D, venture capital, licensing hot technologies... All of this gets cheaper as Wall Street $$$ dry up. CSCO can earn a billion a year just on interest. Bottom line - if cash is king, CSCO is more kingly than almost anyone on the planet.

I'd love to hear your thoughts on those two questions, but the decision to buy is a lot more complicated than that. I'm very interested to hear what specifically convinced you to include Cisco in your Strategy Lab Open portfolio. What do you like about the stock right now? What sort of gains are you targeting by the end of the contest?

I hope I covered that in the first two answers, also see my SLO blog of Wed 8 Aug titled 'Go Cisco'.

Disclosure - I own shares of CSCO.

Comments: View Comments |  Friday August 10, 2007