Cisco: The Market Is Currently Punishing This Gem

Summary:

  • Cisco’s history of maintaining high profitability and generating strong free cash flow underscores its financial strength despite modest revenue and net income growth.
  • Undervaluation persists despite forecast revisions, with potential upside of 30%-40%. Risks include continued downward forecasts and market sentiment, but the outlook supports a strong buy rating.
  • Cisco can miss estimates in 2023-2026 and still be undervalued in case it beats earnings in 2027-2029.
  • Investors are presented with an attractive opportunity to capitalize on Cisco’s undervaluation, since its stock price has stayed almost flat in the past 5 years.

Mobile World Congress 2023 Barcelona Logotypes

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Thesis

In my previous article about Cisco Systems, Inc. (NASDAQ:CSCO), published prior to Q1 2024 earnings, I rated Cisco as a “strong buy,” and suggested an upside of approximately 47.5%. However, following the release of Q1 2024 earnings

TABLE OF ASSUMPTIONS
(Current data)
Assumptions Part 1
Equity Market Price 204,310.00
Debt Value 11,605.00
Cost of Debt 3.89%
Tax Rate 16.15%
10y Treasury 4.207%
Beta 0.93
Market Return 10.50%
Cost of Equity 10.06%
Assumptions Part 2
CapEx 807.00
Capex Margin 1.41%
Net Income 13,442.00
Interest 451.00
Tax 2,589.00
D&A 670.00
Ebitda 17,152.00
D&A Margin 1.17%
Interest Expense Margin 0.79%
Revenue 57,233.0

Revenue Net Income Plus Taxes Plus D&A Plus Interest
2024 $52,170.0 $15,044.05 $17,473.66 $18,084.39 $18,495.49
2025 $54,390.0 $15,773.95 $18,321.44 $18,932.17 $19,343.27
2026 $55,880.0 $16,544.40 $19,216.31 $19,870.47 $20,310.81
2027 $58,240.0 $16,949.90 $19,687.30 $20,369.09 $20,828.03
2028 $60,140.0 $17,842.00 $20,723.48 $21,427.51 $21,901.41
2029 $61,775.8 $18,687.71 $21,705.77 $22,428.95 $22,915.75
^Final EBITA^

Secure, Agile Networks Services Internet for the Future End-to-End Security Collaboration Optimized Application Experience
2023 29,188.8 13,735.9 5,151.0 4,006.3 4,006.3 572.3
2024 31,197.0 14,681.0 5,851.5 4,426.2 4,527.1 611.7
2025 33,343.4 15,691.0 6,647.3 4,890.0 5,115.7 653.8
2026 35,637.4 16,770.5 7,551.3 5,402.5 5,780.7 698.8
2027 38,089.3 17,924.4 8,578.3 5,968.7 6,532.2 746.8
2028 40,709.8 19,157.6 9,745.0 6,594.2 7,381.4 798.2
2029 43,510.6 20,475.6 11,070.3 7,285.3 8,340.9 853.1
% of Revenue 51.00% 24.00% 9.00% 7.00% 7.00% 1.00%

Revenue Net Income Plus Taxes Plus D&A Plus Interest
2024 $61,294.5 $13,785.13 $16,011.42 $16,728.97 $17,211.97
2025 $66,341.2 $14,920.13 $17,329.72 $18,047.27 $18,530.27
2026 $71,841.3 $16,157.10 $18,766.46 $19,607.48 $20,173.59
2027 $77,839.7 $17,506.14 $20,333.37 $21,244.60 $21,857.99
2028 $84,386.1 $18,978.44 $22,043.45 $23,031.32 $23,696.29
2029 $91,535.9 $20,586.42 $23,911.12 $24,982.69 $25,704.00
^Final EBITA^


Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CSCO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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