There is a sound argument to be made for buying blue chip, large cap stocks, because they are relatively safe. This is especially true when a company has exhibited consistently strong earnings and can be purchased on a value basis.
- Market Cap. between 10 bln. and 200 bln.
- Price to book under 2
- Dividend Yield Positive (>0%)
- Operating Profit Margins over 15% (CSCO’s is nearly 20%)
- Net profits margins over 15%
- Price to Earnings Ratio under 15
- Forward Price to Earnings ratio under 10
- Return on Equity over 10%
- Current Ratio over 1
We don’t typically like to use forward P/E ratios, but in the case of large cap. blue chips, whose earnings are stable, there is some validity to this otherwise speculative measure. Considering the "current ratio" is important because it is a measure of a company’s ability to cover immediate costs, and thus is an important characteristic of safety. Despite this, we used a conservative factor of just 1 (Cisco’s Current Ratio is 3.43)
**If we had used a factor of >3 for the "Current Ratio", our query would have produced only one results other than CSCO.
These criteria produced the following 6 results from the original list of 6,784 companies from around the globe:
|T.||Company||M. Cap||P/B||Div.||O. Margin||P. Margin||P/E||F. P/E||Ret. on Equity||C. Ratio|
|PBR||Petroleo Brasileiro||$ 216,118||1.21||0.45%||20.12%||16.22%||8.58||9.11||17.88%||1.9|
|GLW||Corning Inc.||$ 32,293||1.59||0.97%||26.08%||49.81%||9.35||9.18||19.06%||4.77|
|TKC||Turkcell Iletisim||$ 12,628||1.95||4.26%||18.47%||18.17%||11.5||9.63||17.59%||2.88|
|CSCO||Cisco Systems, Inc.||$ 91,765||1.95||1.45%||19.93%||16.78%||13.1||9.71||15.80%||3.43|
|APA||Apache Corp.||$ 46,884||1.86||0.49%||44.41%||25.94%||13.2||9.31||16.75%||1.01|
|TEVA||Teva Pharmaceutical||$ 46,535||1.92||1.66%||23.59%||20.67%||13.3||8.7||15.82%||1.36|
That is to say about 1/10 of 1% of the publicly listed large cap. companies in the world exhibited approximately the same earnings and value characteristics as CSCO.
2. Revenue has grown from 28.5 bln. in 2006 to 42.8 bln in the last twelve months (an increase of some 50%)
3. Average operating income in the last five fiscal years averaged 23.3% (strong by any measure)
4. Operating cash flow (TTM) was 10.5 bln.
5. In the last five years, owners’ equity has grown from 23.9 bln. to 47.2 bln. (about 100%).
|Year||Owners Equity||Market Price @ FYE|
|**2011 through Q3||$ 47,206,000,000|
|Owner Equity||$ 34,531,800,000|
|Shares Outstanding||5.95 bln.|
|As of Today|
|Owner Equity||$ 47,206,000,000|
|Shares Outstanding||5.50 bln.|
- There is 450 mln. fewer shares outstanding now than there was on average between 2006 and 2010.
- The company now has about 13 bln. more in equity to strengthen the share price, than it did in aggregate between the same years ( almost 2 bln. more in equity since we published the Feb. 12th article alone).
Unconventional thoughts on value investing
2. Forgive CSCO Management for the premium paid by CSCO investors out of the speculative fervor of years past and recognize the superior value in the share price today, particularly on a relative basis.
If business were about popularity (in the long run) we would concede to our countless detractors, and stop buying CSCO shares. But as it turns out business is about making money last time we checked, so we’re still buying.
CSCO has an enterprise value of only 64.8 bln, with 11% of that value being returned to owners in the last twelve months as 7.2 bln. in Net income. 16.3% of the enterprise value, or 10.5 bln. was operating cash flow in the last year alone.
Alas, we don't expect many to embrace these views, as it turns out, value investing is a lonely business.