If you had a spare $300 billion lying around, then you could
Cisco Systems (Nasdaq:
. Good thing you resisted the urge to do so back in 2000. Back
then, it would have cost you nearly $1.2 trillion to buy the three
tech giants. Who has that kind of money lying around?
Microsoft looks like the relative hero of this group, having only
fallen 55% since the end of the dot-com boom. Cisco has lost more
than 80% of its value and Nokia nearly 90%. But if every dog has
its day, then which of these dogs can regain some of the former
Nokia and Microsoft: permanent casualties of
stunning growth (its
has risen from $5 billion in 2003 to a recent $300 billion) has
come at the expense of so many other tech companies, though perhaps
none have felt the pain as much as Microsoft and Nokia, which were
themselves once a favorite brand of tech consumers. These days, the
two humbled giants are working together in hopes that their
combined strengths can offset the Apple juggernaut. In coming
quarters, look for a new range of Nokia's phones that run on
is a mixed blessing for Nokia. On the one hand, if Microsoft
managed to create real buzz for its upcoming new mobile phone
software, then Nokia could see demand for its phones rebound
nicely. Then again, the deal ties Nokia's hands, perhaps preventing
the company from joining forces with (or selling itself to) other
tech firms that would love to capture Nokia's still strong
Right now, investors are looking to these two firms' balance sheets
for signs of hope. Nokia has more than $7 billion in net cash,
almost one-third of its entire market value. That kind of money
could help fuel a big research and development oracquisition push,
though the current management appears a bit paralyzed at the moment
and looks ill-equipped for a bold stroke.
Microsoft's cash (roughly $50 billion and rising), coupled with $15
to $20 billion in annual
free cash flow
, creates a very different value proposition. The company's share
count has shrunk from 11 billion in 2005 to a recent 9 billion, and
the company could buy back another 1 billion
every year and still remain fiscally strong. Shrinking the share
count by 10% or more every year is a sure-fire way to boost
, as I noted in this article.
(Link to buyback piece sent in last week)
Yet few investors expect either of these companies to get up off
the mat anytime soon, at least while Apple and
continue to upend the consumer device space.
But what about Cisco, which could seemingly do no wrong until it
suddenly could do no right? The company's stock has been getting
battered in recent quarters, as profits flatten and sales growth
cools into the single-digits.
Investors need to make a clear distinction. Nokia and Microsoft are
struggling to stay relevant in a world dominated by far more nimble
competitors, but Cisco is suffering from a tough environment for
government spending and a near-term lull in game-changing
innovations. It may only be a matter of time before this situation
changes. Cisco is pushing very hard in a wide range of
newly-growing areas such as video-conferencing, corporate
communications platforms and high-speed data transmission switches.
Part of Cisco's problem stems from the fact it is pursuing a wide
range of opportunities and investors have a hard time valuing each
effort. This is why the stock trades for just six times projected
fiscal (June) 2012 profits when the company's cash is excluded.
Analysts at Sterne Agee sought to break Cisco down, assigning a
value to each of its businesses relative to where peers are valued.
Here's what they came up with:
- Routers -- $7 a share
- Switches -- $7 a share
- New Products -- $5 a share
- Services -- $4 a share
- Net cash -- $4 a share
That adds up to $27, or 80% above the current share price. Whereas
many investors see a company in the midst of a terminal decline,
Sterne Agee analysts give credit to Cisco for efforts to right the
ship: "We believe the CSCO story is getting better and we'd rather
be a buyer at these depressed levels than wait for obvious evidence
of improvement. By then it may be too late."
I've held that opinion for some time, thinking shares were too hard
to ignore when they fell to $20. ["
5 Reasons to Love Cisco in 2011 and Beyond
Now that they've fallen to $15, Cisco's strong
margins and heavy research and development spending make the stock
even more compelling.
Action to Take --> Cisco may be the first of the three companies
to right the ship, but Microsoft and Nokia are compelling possible
investments, too. You'll need to spend a lot of time analyzing
these stocks if you're thinking about buying, though. Each firm is
working to pull itself out of a deep hole, and shares are so cheap
-- relative to both the balance sheets and free cash flow
generation -- that any signs of a
would quickly pull many investors right back in and send the stocks
-- David Sterman
P.S. -- We've just identified six surprising events that could
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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