There is no doubt that earnings season is my favorite time of year from an investing perspective. Every quarter Wall Street overreacts to dozens of seemingly disappointing profit reports and punishes stocks in the process. For a deep value, contrarian investor like myself, it’s Christmas, Hanukkah, and Kwanzaa all wrapped into one. One of this month’s best holiday doorbusters has to be networking giant Cisco Systems (CSCO), whose shares have fallen 20%, from $24 to $19, after the company guided down for the current quarter.
Now, I understand that investors hate quarterly misses, especially for larger companies like Cisco whose businesses typically have far more visibility than smaller upstarts. That said, Cisco’s current valuation (12x trailing earnings, 7x trailing cash flow, and 11x 2011 profit estimates) makes it seem like this company is barely growing at the rate of GDP. That does characterize some mature tech forms such as IBM (IBM), which only grows sales at 3%-4% and also fetches about 11 times earnings.
Despite recent softening in some of their businesses (especially sales to governments), Cisco is still growing sales and earnings at double digit rates and should continue to do so. This is a classic case of getting to buy a company that is growing faster than the S&P 500 at a discount to the market’s overall valuation. Not to mention that Cisco is a leading company in an excellent and highly profitable industry. I would be quite surprised if Cisco shares didn’t reclaim all of the recent losses sometime over the next 12-18 months.
Full Disclosure: Peridot Capital was long shares of both Cisco and IBM at the time of writing, though positions may change at any time.