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Published: November 1, 2010
About a week ago, a
press release announced that the University of Virginia Press
would be making tens of thousands of writings and documents from
the nation's Founding Fathers available on the Internet. By
2012, instead of having to rely on what was written about George
Washington or Thomas Jefferson, individuals will be able to read
their original thoughts on many important subjects.
The news is of obvious excitement to historians and other
history buffs, but also serves as yet another indication of the
growing importance of digital technology to businesses and
society as a whole. Websites and social networks are other
examples and mean continued leaps in demand for storing and
retrieving increasing amounts of digital content.
Tech giant Cisco (Nasdaq: CSCO) frequently talks about
"the human network," which it defines the most important asset
in the information technology (IT) industry. It defines this
network as "the platform to change the way the world works,
lives, plays, and learns." This statement definitely may be
advertising fluff, but it also happens to be a good way to
identify the vast array of markets the firm's products address
to make it a reality.
Cisco logged $40 billion in revenue last year and builds
networks feeding off the convergence of networking, computing
and storage of data, be it for personal or corporate use.
Routing and switching, which includes products such as data
center switches, is Cisco's bread-and-butter business and still
at the forefront of its product offerings. But the company has
also evolved into fields like smart grids, virtual healthcare
and teleconferencing via Cisco TelePresence, just to name a few.
That Cisco can continue to
expand after nearly two decades of breakneck expansion speaks to
just how much industry growth remains. It already boasts more
than 1,700 global customers, while switching revenue grew +12%
last year in what was otherwise a down economy. Acquisitions
also play a key component of management's focus to build, buy
and partner its way to growth. Last year, Cisco acquired
Tandberg to beef up its videoconferencing abilities, and has
also been on the bandwagon to acquire web security firms.
Cisco has grown sales at close to an average of +8% annually in
the past decade, while earnings have grown nearly +14% each
year. Keep in mind that Cisco has accomplished this through two
major recessions that included a technology stock bubble and
global credit crisis, which speaks to the fact that Cisco is
somewhat recession proof, given the consistent demand from its
underlying markets. Profits are also stellar and operating
margins are consistently above 20%.
Cisco is also very financially sound. As of the end of its most
recent quarter, the firm had nearly $40 billion cash on the
balance sheet. Subtracting out the company's
long-term debt of $12 billion leads to a net cash position
of some $28 billion -- a significant
war chest to pursue acquisitions, repurchase stock and
perhaps pay a dividend, which is apparently close to happening.
Action to Take --->
Analysts project Cisco to post $45 billion in sales this year --
a +13% increase compared with the previous year. The consensus
earnings projection is $1.73 per share, which puts the forward
P/E at under 14. The trailing
free cash flow multiple of less than 15 is also quite
reasonable.
Overall, at the current share price, valuation, and expectations
for compelling growth going forward, Cisco thinks it can grow
between +12% and +17% in the longer term. And for Cisco, every
quarter leads to billions more in excess cash that will at some
point need to be deployed prudently, so it's only a matter of
time before more shareholder-friendly moves come to fruition.
For these reasons, Cisco is the best tech stock money can buy in
the market today.
-- Ryan Fuhrmann
Contributor
StreetAuthority
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