International Business Machines Corp. (IBM), Cisco Systems, Inc. (CSCO): What Are The Potential Catalysts?

In many of my previous writings, I recommended buying “old tech” companies — mostly due to their cheap valuations and P/E ratio compression, great financial shape, and impressivedividend increases. Two of these companies have finally started to break-out:

While International Business Machines Corp. (NYSE:IBM) has witnessed a setback due to a disappointing quarter that stunted its breakout for a reason, it seems like Cisco Systems, Inc. (NASDAQ:CSCO) just hasn’t been able to find a way to ride the tech wave up. Cisco’s story of unfairly-assigned cheap valuations and nice dividend increases hasn’t changed, either:

Cisco Systems, Inc. (NASDAQ:CSCO)’s decade-long, flat share price is masking the company’s increasing earnings power. Its fellow “old tech” companies like Microsoft Corporation (NASDAQ:MSFT) saw similar predicaments before finally breaking out. Cisco just needs a catalyst. The stock market is a weighing machine in the long-run, and that’s why I’m confident that, like Microsoft, Cisco’s share price will inevitably catch up with its increasing earnings.

So what are the potential catalysts?

Well, dividends for one, are a potential catalyst. If Cisco Systems, Inc. (NASDAQ:CSCO) continues its impressive string of increasing its dividend, they will attract a lot more attention — especially from income investors:

While the company hasn’t offered a dividend to investors for long, it has increased the dividend so much and so quick that it should attract many a dividend growth investor’s attention — especially if the trend continues.

And then there’s the future of the Internet…

Cisco Systems, Inc. (NASDAQ:CSCO) is pushing into what it’s calling the “Internet of Everything” or IOE — which it defines as “the networking of people, processes, data and objects.” They estimate the value of the IOE to be around $14 trillion over the next 10 years. Cisco expects 50 billion objects being connected by 2020 — and as of now, 99% of physical objects aren’t yet connected. They are not alone in their pursuit of building a world of connected devices either, and their Internet of Everything may soon be competing with International Business Machines Corp. (NYSE:IBM)’s “Internet of Things.”

The Internet of Things envisions a world where smart, connected devices can not only communicate with themselves like Cisco Systems, Inc. (NASDAQ:CSCO)s IOE, but also diagnose and monitor themselves, as well. International Business Machines Corp. (NYSE:IBM) cites a report estimating that there will be over 22 billion devices connected via Internet by 2020, capable of generating a whopping 2.5 quintillion bytes of new data daily.

Cisco, International Business Machines Corp. (NYSE:IBM), and even companies like General Electric Company (NYSE:GE) with their “Industrial Internet” are looking to sync a variety (and even a majority) of devices and machines via sensors connected to network infrastructure. GE wants things such as “smarter trains” and turbines, and IBM, with its Smarter Planet Initiative, wants our globe to be connected with everything from smarter refrigerators to smarter buildings.

This scenario is eerily realistic and is gaining steam.

Microsoft Corporation (NASDAQ:MSFT) has already linked up with Ford Motor Company (NYSE:F) by creating their SYNC technology — built on a Windows embedded automotive platform — in an effort to move closer to a connected “smart car”. This enables Ford to sell “smart” cars capable of connecting with devices such as smartphones. While this is a small step in the name of connected-everything, Microsoft and Ford are early innovators pushing the envelope of connected automobiles — which will eventually be able to analyze data in real time. Drivers will be able to monitor their car’s diagnostics and adjust their driving to increase fuel efficiency.

The Internet will inevitably connect everything together, and Microsoft Corporation (NASDAQ:MSFT) has wedged itself into a relationship with Ford Motor Company (NYSE:F) that should give them a head-start in the automobile industry. Microsoft is also becoming a major player in the cloud-computing world, as well. The company may slowly begin to seep into connected smart devices and other things such as smart appliances with Windows.

So how will Cisco capitalize on this?

Cisco has been called the “backbone of the Internet” and will be one of the companies that benefits the most from an internet-connected world. The company is also aggressively getting into another internet-related industry that should continue to rapidly grow — security.

The company is pushing into security to modernize the connection grid. According to a press release, Cisco’s Connected Grid Security Architecture “is a blueprint that simplifies policy administration, strengthens security controls and gives business more flexibility and increased visibility into operations.”

With everything connected to the Internet, security (especially relating to critical infrastructure, such as utilities) will need to be increased, and Cisco is taking advantage to fulfill this need and looking to become the leader.

The bottom line

Cisco is still ridiculously cheap, even in relation to its peers in the old tech world, who recently lagged the market significantly.

In relation to earnings, Cisco is the cheapest “dot.com remnant” both now and going forward.

Cisco stands out as not only one of the only “old school” tech companies that hasn’t started to run-up, but also as one of the few Dow components that hasn’t shot up yet as well. Collecting the nice 3.30% dividend that Cisco currently offers while waiting for capital appreciation should also pay off, like it did for investors who purchased Microsoft Corporation (NASDAQ:MSFT) before its recent run-up. Microsoft yielded well over 3% before its earnings inspired price increase.

Scoop up some shares of Cisco now and get paid nicely to wait — before the market realizes Cisco’s true intrinsic value and future prospects.

Joseph Harry owns shares of International Business Machines., Microsoft, and Cisco Systems. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. and Microsoft.

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