Cisco's Big Sell-Off Makes Its Shares a Steal
Thursday's pounding was so severe you'd be forgiven for thinking Cisco blew its quarterly earnings report -- but that's hardly the case. The company comfortably beat Wall Street estimates on both the top and bottom line. Not that that's anything new. Cisco has a history of giving conservative guidance -- and the Street has a habit of taking the bait. The company's easily exceeded forecasts on both its top- and bottom-lines for at least nine quarters in a row, according to data from Thomson Reuters (TRI).
Rather, traders were spooked by Cisco's failure to lift its guidance above Street expectations. Cisco, you see, was trading like a momentum stock. Investors betting on momentum don't just need a company to eclipse estimates (by a lot) -- they're also counting on management to raise its outlook.
A Bargain Stock?
"Shares may come under moderate pressure near term, as momentum investors vacate in the wake of the first quarter in nearly a year in which core Cisco estimates are likely not to be positively revised in a material way," wrote Paul Mansky, an analyst with Canaccord Genuity, in a Thursday note to clients. "We encourage longer term GARP [growth at a reasonable price] and value investors to capitalize on that opportunity."
The stock's relative valuation sure makes a strong case for buying Cisco on the dip. At just 14.7 times forward earnings, Cisco offers nearly a 15% discount to its own five-year average and more than a 50% discount to peers, according to Thomson Reuters data. Shares look even cheaper on a trailing earnings basis.
Perhaps most interesting is Cisco's price/earnings-to-growth (PEG) ratio, which measure how fast a stock is rising relative to its growth prospects. On that basis Cisco trades at a 7% discount to its own five-year average and about a 25% discount to the S&P 500 ($INX).
Of the 38 analysts surveyed by Thomson Reuters, 31 rate shares a buy, six call it a hold and one has it at under perform (sell, essentially). Meanwhile, their median price target stands at $31 a share, making the implied upside more than 20% in the next 12 months or so. In other, words, Cisco might be a beaten down blue chip today, but it's unlikely to stay that way for very long.