Cisco Systems, Inc. (CSCO): Ignore This Analyst Downgrade

Juniper sees downgrade as well

Along with downgrading Cisco Systems, Inc. (NASDAQ:CSCO), FBR downgraded competitor Juniper Networks, Inc. (NYSE:JNPR) as well for the same reasons. Juniper Networks, Inc. (NYSE:JNPR) is a much smaller company than Cisco, 10 times smaller by revenue, and saw its revenue and profit decline in 2012. In contrast, Cisco increased both revenue and profit in fiscal 2012, and in the quarter ending in January saw a year-on-year revenue increase of about 5%.

Juniper trades at a far higher multiple than Cisco does. 2012 was a particularly weak year, with FCF falling dramatically to $228 million. The 5-year average FCF is about $585 million, or about $1.11 per share. With about $5 per share of net cash and investments and a stock price around $18.50, the adjusted P/FCF is 12 using the 5-year figure, and about 31 using last year’s figures. By either measure Cisco is significantly less expensive. And Cisco has been able to maintain revenue growth while Juniper has not.

UBS disagrees with FBR

Another analyst, this one from UBS, put out a dissenting opinion on April 1. Stating similar reasoning as I have here, namely the large stockpile of cash and the strong free cash flow, this analyst believes that Cisco Systems, Inc. (NASDAQ:CSCO) will be able to navigate any industry transition. Along with this the price target was raised to $25 per share, a much more realistic fair value in my opinion.

The bottom line

The downgrade from FBR seems to be awfully pessimistic. Considering Cisco’s huge pile of cash, the strong cash flow, and the fact that Cisco has been able to maintain revenue growth while competitor Juniper has not leads me to believe that Cisco is in fine position to prosper. The company can make large acquisitions as needed, allowing it to take advantage of an industry transition instead of becoming a victim of one. Trading at 7.5 times the free cash flow Cisco Systems, Inc. (NASDAQ:CSCO) looks like a bargain at these prices. And at least one analyst agrees.

The article Ignore This Analyst Downgrade originally appeared on Fool.com and is written by Timothy Green.

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