Opportunities abound in telecoms infrastructure, particularly for Cisco. The industry is well placed as next-generation wireless and fixed line networks are rolled-out to satisfy data-hungry devices such as tablets and smartphones.
The $90bn networking giant boasts a 64% market share in internet protocol TV (IPTV), 53% in optical routers, 69% in switches, 44% in storage area networks, 53% in wireless local area networks (LAN) and 38% in web conferencing. This is all backed up by 8,000 patents, 20,000 engineers and an annual R&D budget worth $5.8bn.
In short, Cisco is an expert on everything internet-related, as evidenced by its gross margins of 62%. And in a world of clouds, video, social media, data warehousing and mobile device proliferation, the role of the network has never been greater.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Another bright spot is the forthcoming upgrade cycle to 100-gigabit technology. With data traffic growing 30%-40% a year until 2015, carriers are being forced to shift to higher bandwidth switches to keep up with exploding volumes. Cisco is also seeing the benefits of last year's 6,500 headcount reduction and the mothballing of its Flip video camera arm.
Cisco (Nasdaq: CSCO), rated a BUY by Evercore Partners
For the year ending July, Wall Street is predicting turnover and underlying earnings per share (EPS) of $46bn and $1.84 respectively, rising to $48bn and $1.92 a year later. That puts the firm on a price/earnings (p/e) ratio of less than ten, with a 1.9% yield. The balance sheet has net cash of $29.8bn that's plenty of ammunition for future acquisitions. So I rate the stock on eight times 2012's earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for cash generates an intrinsic worth of $23 per share.
Cisco is exposed to risks such as price deflation, competition, foreign currency movements and component supply issues. Another concern is the recent soft patch caused by the uncertainty generated from the European debt crisis and the forthcoming US presidential elections. Last month CEO John Chambers warned that as a result nervous business customers are unwilling to spend on internet-related kit albeit they should still "spend more in the second half".
Yet with a huge installed base providing a rich seam of recurring revenues and cross-selling opportunities Cisco should ride out today's headwinds. Evercore have a price target of $26.
Rating: BUY at $16.50
Paul Hill also writes a weekly sharetipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more.
-
UK food price inflation rate ‘lowest level in two years’, British Retail Consortium findsNews Food price inflation is at its slowest rate since March 2022, according to the BRC. It also found non-food products have gone into deflation.
-
Top-quality, rapidly growing European stocks are selling at enticing valuationsTimothy Lewis, portfolio manager at JPMorgan European Growth & Income tells us where he’d put his money
