Why I'm Buying Shares of Cisco -- Again
Aug 8th 2011 7:08PM
Updated Aug 8th 2011 7:10PM
This article is part of our Rising Star portfolio series.
In late June, I notified readers that I'd be buying about $600 worth of Cisco Systems (NAS: CSCO) shares for my real-money Motley Fool portfolio. Since that time, the stock has dropped close to 7%, providing me with an opportunity to grab even more shares, but at a much cheaper price.
Should you be scared of the price drop?
Consider the drop in Cisco's stock price in context. Over the past three months, Cisco has shed about 17% of its share price, but rivals Juniper (NAS: JNPR) and F5 Networks (NAS: FFIV) have lost about 42% and 22%, respectively. The Nasdaq Composite is down about 13% as well.
Also over the past three months, unemployment has remained stubbornly high and still sits at 9.1%, while the debt crisis in Europe has intensified even more. And now the United States' credit rating has been downgraded for the first time in modern history. These events obviously don't bode well for any company, let alone one like Cisco that has had its fair share of problems.
And there's no denying that problems still exist at this $80 billion tech behemoth. Cisco has lost market share to competitors such as Juniper, Brocade (NAS: BRCD) , and Riverbed Technology (NAS: RVBD) . Internal affairs have served as a distraction to management, and the past few years of consumer-oriented focus has caused Cisco to lose momentum and profitability.
What else has happened?
Since my last purchase, Cisco also announced that it will lay off about 6,500 workers around the globe, a number that represents about 9% of its total workforce. It's also selling its set-top box manufacturing plant in Mexico, which should result in another 5,000 workers that Cisco won't have to employ. These moves are in line with Cisco's earlier announcement that it will reduce overhead and expects to see about $1 billion in savings from these maneuvers. According to a Goldman Sachs analyst, these cost-cutting measures could "drive 5% to 10% upside to fiscal-year 2012 EPS estimates."
Although investors everywhere are nervous about high unemployment and the effect that it could have on global spending, it seems as though corporate profits are still raking in huge numbers. In fact, global IT spending has been upwardly revised and is now projected to hit $3.67 trillion in 2011, a 7.1% increase from the $3.42 trillion that was spent in 2010. This bodes well for companies like Cisco that rely almost entirely on businesses that upgrade their IT infrastructure, as opposed to more consumer-facing companies.
Oh, and just to top things off, six executives from rival Juniper have jumped ship and landed at Cisco headquarters. Can't be too bad a thing when high-ranking employees are leaving the competition and coming to your company.
The foolish bottom line
Cisco reports earnings this Wednesday, and analysts are already expecting the company to meet the very low end of its expectations, which leads me to believe that any inkling of good news has the ability to send the share price upward. And with the stock sitting just below $14.00 as of the end of trading Monday (down more than 6%) and sporting a P/E of about 11, I want to make sure I grab shares before the earnings report hits.
What do you think? Would you buy shares today, or would you rather wait for the earnings report? Sound off in the comments section below, or add Cisco to My Watchlist to get our latest commentary when earnings come out on Wednesday!
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At the time this article was published Jordan DiPietro owns none of the stocks mentioned here. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Riverbed Technology and Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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