Earnings

Dissecting the Numbers for Cisco Systems, Inc. (CSCO) and Palo Alto Networks, Inc. (PANW)

Cisco Systems, Inc. (NASDAQ:CSCO) shares are up more than 12.34% this year and recently decreased -0.12% or -$0.04 to settle at $33.95. Palo Alto Networks, Inc. (NYSE:PANW), on the other hand, is up 10.89% year to date as of 11/13/2017. It currently trades at $138.67 and has returned -6.29% during the past week.

Cisco Systems, Inc. (NASDAQ:CSCO) and Palo Alto Networks, Inc. (NYSE:PANW) are the two most active stocks in the Networking & Communication Devices industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CSCO to grow earnings at a 10.24% annual rate over the next 5 years. Comparatively, PANW is expected to grow at a 23.53% annual rate. All else equal, PANW’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Cisco Systems, Inc. (CSCO) has an EBITDA margin of 27.39%. This suggests that CSCO underlying business is more profitable CSCO’s ROI is 9.30% while PANW has a ROI of -15.80%. The interpretation is that CSCO’s business generates a higher return on investment than PANW’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. CSCO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.47. Comparatively, PANW’s free cash flow per share was +2.09. On a percent-of-sales basis, CSCO’s free cash flow was 4.85% while PANW converted 10.91% of its revenues into cash flow. This means that, for a given level of sales, PANW is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CSCO has a current ratio of 3.00 compared to 1.60 for PANW. This means that CSCO can more easily cover its most immediate liabilities over the next twelve months. CSCO’s debt-to-equity ratio is 0.51 versus a D/E of 0.00 for PANW. CSCO is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CSCO trades at a forward P/E of 13.29, a P/B of 2.56, and a P/S of 3.51, compared to a forward P/E of 33.66, a P/B of 16.59, and a P/S of 7.17 for PANW. CSCO is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CSCO is currently priced at a -4.98% to its one-year price target of 35.73. Comparatively, PANW is -13.73% relative to its price target of 160.74. This suggests that PANW is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for CSCO and 2.00 for PANW, which implies that analysts are equally bullish on their outlook for the two stocks.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CSCO has a beta of 1.18 and PANW’s beta is 1.02. PANW’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CSCO has a short ratio of 2.55 compared to a short interest of 3.50 for PANW. This implies that the market is currently less bearish on the outlook for CSCO.

Summary

Cisco Systems, Inc. (NASDAQ:CSCO) beats Palo Alto Networks, Inc. (NYSE:PANW) on a total of 7 of the 14 factors compared between the two stocks. CSCO is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, CSCO is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, CSCO has better sentiment signals based on short interest.

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