This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

And now, for a few words from your sponsors
Did you hold Cisco (NAS: CSCO) stock through the bad old days of 2011? Well fear not, faithful investor. Your year of tribulation is over, and according to JPMorgan, the good times are about to roll.

Yesterday, Wall Street's favorite megabanker announced that with the pesky year 2011 out of the way -- a year in which Cisco was dogged by "multiple small issues ... that added up to a material year-over-year decline" -- it's finally safe to get back in the pool. Finally safe to buy Cisco ... so JP Morgan advised its clients to do just that.

Let's go to the tape
Now, about those "multiple small issues." They weren't exactly "small." In fact, you could probably argue that the DOA failure of Cisco's Cius tablet computer, the mispricing of its umi home video conferencing system, and the eventual killing of the Flip digital camera added up to a full-blown identity crisis at Cisco.

Meanwhile, the company's core switches and routers markets got positively devastated, with Hewlett-Packard (NYS: HPQ) and Juniper Networks (NYS: JNPR) teaming up to steal switches business from the Internet giant, and Riverbed Technology (NAS: RVBD) and F5 Networks (NAS: FFIV) trying to reroute its router customers into their own solutions in other areas of networking. JPMorgan doesn't see this repeating itself in 2012, arguing that it's not "likely that this many things can go wrong again."

Me, I'm not so sure. While it's true that Hewlett-Packard has come upon hard times, with sales down 3.5% in the most recent quarter, that's mainly HP's own fault and mainly tied to the company's difficulties in the PC and tablets markets. As far as Cisco's other antagonists go, though, I still see a challenge for Cisco. In the most recent quarter, Juniper's sales were up more than 9%, or more than twice the gains Cisco notched. Riverbed and F5, meanwhile, both notched mid-20s sales gains -- multiples better than what Cisco achieved. Seems to me the rivals remain a clear and present danger to Cisco.

Foolish final thought
But that's not necessarily bad news. Thanks largely to the fact that Cisco still faces challenges, its stock can today be bought for bargain prices. You see, while only moderately cheap on the surface, Cisco's about 50% more profitable than meets the eye. With $6.3 billion in trailing net income, the company looks like a about a 16 P/E stock. But look a little closer, and what do we find?

  • $9.6 billion in annual free cash flow.

  • $28 billion in net cash on the balance sheet.

  • Accordingly, an enterprise value-to-free cash flow ratio of just 7.6.

That's not a bad price for a company that most analysts on Wall Street believe will grow at 8.2% per year over the next five years. When you consider further that Cisco pays its shareholders a 1.3% annual dividend, Cisco looks even cheaper.

Long story short, I'm siding with JPMorgan on this one. Cisco may not be the absolute best bargain in tech right now (to find out who is, read the Fool's new free report: "The Only Stock You Need to Profit From the NEW Technology Revolution"). It is, however, a modestly undervalued stock -- and if you ask me, it's a fine choice to start you off in the new year.

At the time thisarticle was published Fool contributorRich Smithowns no shares of, nor is he short, any company mentioned above. To read his past write-ups on Cisco and see his 57 active stock recommendations, visit Motley Fool CAPS and look for him under the handleTMFDitty. He's currently ranked No. 356 out of more than 180,000 members.The Motley Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Riverbed Technology and Cisco Systems and writing covered calls in Riverbed Technology. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.