TAKING STOCK: Cisco's reach from D.C. to Darfur


Dear Mr. Berko:

In April of 2009, I bought 300 shares of Cisco at $17. And as you can see, it is still $17. My broker has advised me to sell it because he believes it could fall to $13 by the end of this year. I wrote you about a year ago when Cisco was $24, and you told me to sell the stock. Obviously, I didn't. Would you advise me to sell the stock today?

NE in Durham, N.C.

Dear NE:

Cisco Systems (CSCO-$16.04) was founded in 1984 by Sandra Lerner and Leonard Bosack, a husband-and-wife team from Stanford University. It's believed Leonard and Sandra named the company Cisco because they were enamored of the Cisco Kid, a character featured in a 1907 short story by O. Henry and later popularized by TV, movies and comic books.

CSCO is a $44 billion provider of Internet Protocol-based networking products for transporting data, video and voice from point A to local area networks, metropolitan-area networks and wide-area networks around the globe, even in strangely peculiar areas such as Darfur, North Korea, Motu Piti Aau and Washington, D.C.! CSCO was one of the hottest stocks of the '90s, splitting nine times between 1990 and 2000, when revenues rose to $7.1 billion and earnings reached 65 cents a share. So 100 shares purchased at $25 in 1990 morphed into 28,800 shares in 2000 worth $2.36 million. That year, CSCO was $82 a share - there was gold dust in the air, it was Christmas every day, and widows, orphans, even the homeless ran after the bandwagon like a Klondike stampede.

Fast-forward to 2011. CSCO's revenues grew six-fold to $44 billion, earnings and book value tripled, but shares tumbled down to $17. How is it possible that CSCO's stock value limped from $82 to $17 while revenues grew six-fold and earnings and book value more than tripled? And isn't it amazing that in the 10 years since CSCO traded at $82 not even Merrill Lynch, nor Lehman, Goldman Sachs, Dean Witter, Morgan Stanley or JP Morgan posted a "sell" opinion on CSCO? Do you know why?

Meanwhile, tell your brokester to stick a carrot in his ear, both ears if he has two carrots. Yep, this 800-pound monster is in the dumpster and trades at a cheap 11 times next year's earnings. CSCO has $8 in cash per share and gushes somewhere between $6 billion and $8 billion in free cash flow annually.

While income will fall 7 percent from 2010 due to one-time occurrences, trusted analysts believe 2012 will benefit from growing strength in data-center devices (storage and switching), plus video conferencing and collaborative products. The long-term demand for CSCO's carrier routers remains strong. CSCO's share of the Ethernet continues to grow. Finally, UCS servers show signs of early success and are certain to expand CSCO's footprint in its data centers, which should deepen customer relationships.

CSCO shares are now trading at one of its lowest price-to-earnings multiples in a generation, driven down (temporarily) by earnings concerns. But earnings for 2012 are expected to rise 15 percent to $1.45 on a 10 percent increase in revenues to $49 billion, plus a free cash flow bonus of $10.1 billion or $1.85 a share. And the 25-cent dividend yielding 1.5 percent should be raised to 36 cents next year to yield 2.2 percent.

Your broker's selling advice isn't worth an oft-used tea bag. Rather, I'd buy CSCO because I think the stock could trade around the $21 to $23 level in the next 12 to 18 months.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Mon, Jul 11, 2011