hey YouTube I'm Jimmy in this video I'm gonna walk you through my analysis of
Cisco Systems ticker symbol see CSCO this continues our series where we're
analyzing all 30 stocks in the Dow Jones Industrial Average with the ultimate
goal of taking those companies and trying to build a great portfolio this
is the seventh video in that series and you can see a link to the playlist in
the description below so I'm going to quickly touch on Cisco's business and
then we can look at a potential shift that appears to be happening in their
core operations or with the direction of where their business is heading and
then we can try to decide if we think that that shift will move the stock
higher from this point going forward so Cisco breaks out their operations into
three primary segments infrastructure platforms applications and security the
infrastructure platform segment accounted for about eighty percent of
revenue while the other 20% was spread around applications and security now at
first glance this is a bit concerning for me you know from a breakdown
perspective mostly because of how the infrastructure platforms segment is
structured this segment mainly works around core networking technologies
think switches routers and data centers and this is how cisco built their
business back when they started in 1984 the hesitation for me and it's not just
my hesitation many analysts are saying the same thing is times appear to be
changing the cloud is steam rolling forward and sure there's always going to
be a place for this segment which sells devices that let's say a big business
had it it would be they have the servers on site as opposed to a business that
utilizes the cloud and some server farm somewhere and the question for me is how
will this business look in the next five years the next 10 if you look at the
past five or the past 10 it's changed rather dramatically and it looks like
Cisco was left a little far behind well the good news is that the company seems
to know this and that's why they're pushing more towards the proper future
which is more subscription-based services versus individual contracts and
that's good from an investor standpoint because subscription based services tend
to be recurring revenue and you can see this is true in some big
acquisitions that Cisco's made in recent years which focuses more on
their applications and security segments both the segments which appear to have a
much brighter future now this brings us to some recent acquisitions
now one thing Cisco loves to do is make acquisitions I counted their
acquisitions and since 2010 they've made 33 acquisitions mostly all-cash
acquisitions which assuming that they have the cash I like better than a company
issuing more shares and diluting current investors which for me generally
seems to be a safer thing there are exceptions to that but generally I
prefer a cash acquisition over a stock acquisition now these acquisitions have
ranged in size from as low as 20 million to as high as 5 billion this table here
this shows all the acquisitions since 2010 but since Cisco has almost 50
billion in revenue I'm not terribly concerned about the 20 million or even
100 million dollar acquisition I'm more interested in the big ones so this table
here this is their largest acquisitions since 2010 this red one here at the
bottom this one actually fell into a segment that they called other after
they acquired this company back in 2012 I highlighted it red because although
this is their largest acquisition recently they're actually in the middle
of selling it which they haven't disclosed what they're selling it for
but I figure we can mark that red just so we know it's not going to be part of
their core business going forward and the fact that they're selling this
particular segment is interesting to me because this goes back to the shift I
mentioned earlier so that the other acquisitions we can see that back in
2012 they made an infrastructure platforms purchase and since then all
the big ones have been apps and security now I think this is a good thing because
as we mentioned before I believe that these two segments have a brighter
potential than the infrastructure platforms segment so for now before we
dive into the potential shift in the business let's look quickly at their
financials so here's a revenue going back to 2010 and as you can see there
are growing fairly nicely from 2010 to 2013 but then they seem to have stalled
out a bit now if we switch over a profit or net income we
see that net income has continued to grow fairly nicely thanks to improving
margins now as we saw from our recent CVX analysis I think it's important to
compare growth to other competitors in the same industry so when we look at
where Cisco generates their revenue and looks like competitors would be
companies like Juniper Networks or NETGEAR so we can see in this chart that
both juniper and Netgear are growing juniper is a blue bars and netgear is the
orange line then if we jump over to their profit we can see that they're a bit
volatile especially net gears orange line but this is a good example of why
they may not be the best comparison because juniper is a ten billion dollar
company and Negear is a two billion dollar company meanwhile cisco is a two
hundred and twenty billion dollar company so now if we account for the
size companies like IBM or Microsoft might be a better comparable so this is
revenue for IBM and Microsoft IBM is the green bars and Microsoft this is a dark
line interestingly iBM has struggled recently while Microsoft has done pretty
well when we switched to profit we can see that iBM has once again continued to
struggle and Microsoft has turned higher over the past few years now if we jump
back to the profit of Cisco we can see that relative to peers cisco has done
fairly decent to make your profit story even more interesting especially from an
earnings per share perspective is their buyback program here we've added their
buyback history over the past few years now I'm personally a fan of buybacks
because I believe it's a good way to return value to shareholders but that's
only true if the stock is not overvalued so was it so what we've added next was
the average forward p/e during that year now you may notice that we have 2018 in
there and that's because Cisco's fiscal year ends in July so it recently ended
so each of these years the average is actually July - July for that fiscal
year now this is interesting especially because when we consider that the sp500
is currently trading at a forward p/e of about 18 times but if we look at
Cisco's history we can see that it's had a fairly low p/e but now what if we
added their own five-year average to each of those years this is what we
come up with now as we could see it looks like Cisco for the first two years
paid less than the five-year average and more recently than that it looks like
that that they paid a bit more than their five-year average now this brings
us to the potential shift the potential opportunity and some recent news back in
February of 2018 after the US tax code reform was announced Well Cisco
announced that they were going to bring back sixty seven billion dollars from
foreign countries into the US then and only then would they be allowed to do
buybacks this repatriation of that cash allowed for this twenty five billion
dollar buyback back in 2018 now they had authorized 31 billion dollars at the
time so there's still another six billion dollars available for buybacks
now I would say that this partially explains management's decision to pay a
higher p/e than the average since the tax change has just happened and they
were sort of forced to they they suddenly had the ability to issue many
more buybacks thanks to the you know influx of cash now another piece of news
that recently came out during their last earnings call was the announcement of
the Duo acquisition now this helps push the advancement of the segment the
security segment and I think this is key for a Cisco to continue to develop now
another thing is that on their balance sheet it looks like Cisco still has
about forty billion dollars in cash now for Cisco this actually isn't that
unusual they've had this level of cash give or take for the past few years now
as far as the potential shift in the business is concerned I think that this
acquisition points to it in fact the past three acquisitions point to the
fact that management has recognized that business is going in a different
direction and frankly I've been somewhat surprised that these acquisitions
haven't been larger because don't forget Cisco is a two hundred twenty billion
dollar company so my question is are they going to begin to make larger
acquisitions we know that they like to make acquisitions
what are they going to do am I going to continue to push towards the developing
cloud business applications business and the security business and
recently management has stated their push to go towards more recurring
revenue streams specifically in the security and application segments if you
pair that with the newly available cash from the repatriation after the tax
changes and I think it's possible that management starts to make bigger
and bigger acquisitions in those two segments which I believe will make their
revenue stickier and over the long run has the potential of a shift there
historically low p/e multiple to something that is more broadly in line
with let's say the market or at least the industry so for me the potential
opportunity is the combination of the fortunate timing of the newly available
cash and the management's push towards a new business model I actually hope that
they don't pay out the six billion dollars that they have earmarked for
buybacks I would rather they announce an acquisition that progresses their new
business direction and I would be very excited if that acquisition was a 20 or
a 40 billion dollar acquisition Cisco after all is a two hundred twenty
billion dollar company and they need big acquisitions if they wants to materially
move their revenue going forward so I believe that if Cisco continues to push
down this road where they're progressing the right kinds of business I believe
their p/e multiples should be higher than the current level of 16x even if
it's just close to the market average of 18x that would imply that Cisco stocks
should be worth closer to $60 per share rather than the current market price of
$48 and that's 25 percent higher I personally like management's new
direction do you agree do you think that Cisco looks like a good value at this
level is the new direction of the business already priced into the stock
it could be and is the cash really potential opportunity or have they
already gone ahead and spent everything that would have been used for me the
real question about Cisco is whether or not it belongs in our ideal portfolio
this one is a borderline one because I don't think we're going to be able to
determine that until we get to the end of the
analysis many people say that Cisco should be a core holding because of what
they do in there the uniqueness of their offerings but I'm not 100% sure yet
we're going to continue our research before we can really determine whether
or not this is worth that plus I want to see do they make these
acquisitions do they continue to do it or is it just a theory that we've come
up with and they never follow through with it if that's the case I believe
that revenue may continue to struggle to move forward and their profit growth may
be capped out because you can only improve margins so much so let
me know what you think in the comments below and don't forget to hit the
subscribe button and if you have any questions or any ideas let me know if
you think this one belongs in the ideal portfolio thanks and I'll see in the
next video