Cisco Systems is the world’s number one supplier of data networking equipment and software. Its products include switches, routers, access equipment, and network-management software that enables data communication among dispersed computer networks. This business recently emerged in newer markets, such as video conferencing, web-based collaboration, and data center servers.
In Chapter 8 of The Intelligent Investor, Benjamin Graham, the father of value investing, describes the concept of Margin of Safety:
Any investor, who’s main goal is to preserve capital, should seek, in all his or her investments, a significant difference between the current value of a business and the price in which the business can be bought. This insures protection in case of an unfavorable event and to maximize the investment return if the analysis is confirmed.
In the words of his disciple, Warren Buffett: “Never depend on a good sale. Get a purchase price so attractive that even a mediocre sale will produce good results.
Although given the title of “Dividend King” we must be vigilant in maintaining price discipline. We typically purchase operating companies at 8-10 times Cash Flow. However, a stock like this warrants special attention due to its size and dominance of their market. Chances are no other company will be able to purchase this behemoth of a company, therefore we will put a value on the business of 30 times Cash Flow.
Conclusion & Valuation
CSCO has strong cash flow, and very low debt! Even though the company recently started paying a dividend, the dividend has doubled. Coupled with a strong share buyback history CSCO is a great company with a great outlook. It is considered the plumbing of the internet!
I am buying up to $27.90 and not a penny more!