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Cisco Is a Steady Free Cash Flow Producer Worth One-Third More

Cisco Systems (NASDAQ:CSCO), the networking and software company, has had extremely good stock performance since the end of October 2020, when it bottomed out at $35.28. As of the afternoon of Apr. 13, the stock was up nearly 47% to $51.40. At the time of the October drop, I wrote an article showing that CSCO stock was worth between $49 and $72, implying an average of $60.50. Now, I believe it is still worth at least 40% more at $72.04.

the cisco (CSCO) logo on a wall
Source: Valeriya Zankovych /

After all, Cisco produced excellent earnings for the quarter ending Jan. 23, 2021. Although GAAP earnings per share (EPS) were down from last year, its non-GAAP earnings were 79 cents per share, up 3%.

Moreover, the company expects to see non-GAAP EPS between 80 and 82 cents for the third quarter. Analysts now forecast EPS of $3.22 for this year.

So, with solid results recently, here’s why Cisco is worth more moving forward.

Valuation of CSCO Stock Using FCF Yield

To get a better understanding of what CSCO stock is worth, there are a couple of ways we can measure valuation. The first is by using its free cash flow (FCF).

This is important since the company produces large amounts of FCF. Typically, FCF is well above stated EPS. For example, for the year ending in January, Cisco generated $2.79 billion in FCF according to Seeking Alpha.

But this is 110% of the amount of net income it generated over that period. This is known as its conversion rate. In the past, Cisco has had conversion rates as high as 130%, as I wrote about in my last article.

Assuming that conversion for 2021 will be 110%, the FCF per share will be $3.54 per share (i.e. the EPS estimate of $3.22 times 110%). Now, assuming a 4% FCF yield, CSCO stock is worth $88.55.

Valuation Using Dividend Yield

Another way to estimate CSCO stock’s value is to use its historical dividend yield. Right now, the company pays a solid 37 cents per quarter dividend or $1.48 per year. This is up from 36 cents quarterly in the prior quarter. This gives CSCO stock a 2.84% dividend yield.

By comparing this dividend to its historical yield, we can estimate the stock’s implied value. For example, Seeking Alpha reports that in 2019 the dividend yield ranged from 2.33% to 3.21%. In addition, its average yield over the past four years has been 3.06%.

Using the minimum yield, CSCO stock is worth $63.52 (i.e., $1.48 divided by 2.33%). This represents a potential gain of nearly 24% over the Apr. 13 price.

So, now we have two ways to value CSCO. The first, using FCF yield, provided an estimate of $88.55. Now using dividend yield, the valuation estimate is $63.52 per share. But there’s one other metric I’d like to use to find the value of the stock: forward price-to-earnings (P/E).

Valuation Using P/E Estimates

Morningstar reports that Cisco has had P/E ratios from 2016 to 2021 ranging from 14.46 to 21.80 times earnings. This does not include an outlier of 139.7 times in 2018. Excluding that outlier, the average P/E ratio is 18.67 over that period.

Today, the EPS estimate for the year ending July 2022 (a little over one year from now) is $3.43 per share. Applying the 18.67 multiple to that ratio provides a target price estimate of $64.04. This represents a potential gain of 25% over today’s afternoon price of $51.40 (April 13).

Now we have three target price estimates. These are based on FCF yield, dividend yield and average historical price-to-earnings. The average of all three is $72.04, or 40% over today’s price at the $51 level.

What to Do with CSCO Stock

Analysts have started to turn positive on CSCO stock after last year’s depressing period during the height of the Covid-19 crisis. Recently, for example, Goldman Sachs analyst Rod Hall regarded the stock as a “reopening play,” according to Barron’s. Hall raised his price target to $59 and issued a rare Buy recommendation, up from Neutral.

Hall envisions there will be more video-conferencing in the return to office work. This will lead to extra spending by corporations on networking equipment with spillover effects to Cisco’s other products as well, such as telecom equipment.

However, most analysts still have price targets right around today’s price. For example, Seeking Alpha reports that 25 analysts have an average target of $52.57, slightly above today’s price.

Therefore, since my price target of $72.04 is well above the consensus of most other analysts, you might want to use some caution. But don’t forget: I was recommending CSCO stock all the way back in late October, when other analysts were still negative.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Mark Hake writes about personal finance on and runs the Total Yield Value Guide which you can review here.

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