Maybe Big Tech Isn’t Dead

Cisco Systems (NASDAQ: CSCO) today reported 4th quarter and fiscal year 2006 results that were positively received by Wall Street.  The shares jumped $2.49 to $19.78, a more than 14% increase, as 221.6 million shares, 3.64% of the company, traded hands. 

The results pushed other tech shares up as investors wondered if there might not be as big a slowdown in tech spending as previously feared:

Cisco’s outlook helped push up the Nasdaq composite index by 1.6 percent and the Standard & Poor’s index by .8 percent as a broad range of high tech shares rose on hopes that corporate spending on technology might not slow by as much as feared earlier.

….. Intel rose as much as 2.7 percent, EMC gained 1.7 percent, software maker Oracle Corp added 3 percent and Hewlett-Packard Co. climbed 2 percent.

This on a day when the Dow fell almost 100 points. (Though the gains did not hold as Intel ended the day up only .2 percent, EMC down .2 percent, Oracle up 1.0 percent and HP up .5 percent). 

So what got the Street so excited about Cisco? 

Cisco reported $28.5 billion in sales for fiscal 2006 (ended July 29, 2006), up from $24.8 billion in fiscal 2005, a 14.9% increase.  Net income, adjusted for the changes in options accounting rules, was $6.0 billion up from $5.74 in fiscal 2005, a 4.7% increase.  Operating and Free Cash Flows were up about 10% to $8.3 billion and $7.6 billion. 

That gives Cisco a trailing enterprise value to free cash flow ratio of 14.7 and a forward ratio of 12.3 assuming 8% growth in free cash flow for fiscal 2007. 

Cisco, like other big tech stocks, is no longer the fast grower it once was.  But these are still premium quality companies trading at cheap valuations.  They deserve a place in your portfolio.

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