Cisco’s P/E Multiple Is At The Lowest Level In 3 Years: Time To Buy Cisco Stock?

Despite declining around 10% since the beginning of the year, we believe Cisco’s (NASDAQ: CSCO) stock has limited upside at the current price of roughly $41 per share. The key is Cisco’s stock is largely around the same level it was at in early 2018 – a little over two years ago. Our dashboard, ‘What Factors Drove 19.5% Change In Cisco Systems Inc Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price gain over the last two years is justified by the roughly 8.1% growth seen in Cisco’s revenues from 2017 to 2019. This combined with a 240 basis points jump in net income margin from 20% in 2017 to 22.4% in 2019 and a reduction in share count due to stock repurchases worth $38 billion helped earnings per share basis swell 37% over this period. Notably, Cisco has about $27 billion in cash and cash equivalents as of the last report, and the company will very likely continue to buy back shares as it still has around $12 billion remaining under its share repurchase program.

However, a marginal drop in Cisco’s P/E multiple has partially mitigated gains to its stock from an upbeat earnings trend. Cisco’s P/E multiple dropped from 18.5x at the end of 2017 to 17.9x by the end of 2019. Moreover, Cisco’s P/E multiple is down to about 16x now, given the volatility of the current situation. This reflects a 13% decrease in P/E multiple from December 2017 to March 2020. Although Cisco’s P/E multiple is at the lowest level seen in the last three years, we believe there is a possibility for further downside as the outbreak of coronavirus increases.

How Is Coronavirus Impacting Cisco’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact Cisco’s revenues as major companies are likely to delay expenses related to upgrading infrastructure and software. However, digital usage is about to get a real push as most employees are working online from home. Even the brick and mortar companies have been forced to experiment with the digital channel. This is likely to expand the company’s offerings for security solutions as well as cloud application services. This is one of the probable reasons that the company has outperformed the broader market since the outbreak of coronavirus.

Between February 19th and April 20th, Cisco’s stock is down 10% of its value (vs. about 15% decline in the S&P 500). A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. However, the stock has recouped most of its losses over recent weeks.

Nevertheless, the company’s revenues are likely to take a hit in the near term as the industry adapts to the digital transition. We believe Cisco’s fiscal Q3 results in May will confirm the trend in revenues. It is also likely to accompany lower FY’21 guidance. That said, the company is in a better position than the other companies to face the repercussions of the outbreak, given its strong cash position and niche business model. As of now, we believe that the company’s stock is fairly priced and offers limited upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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