Cisco has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 9.3% to $68.40 per share while the index has gained 4.5%.
Is now the time to buy Cisco, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Cisco Not Exciting?
We're sitting this one out for now. Here are three reasons why there are better opportunities than CSCO and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Cisco’s sales grew at a sluggish 1.9% compounded annual growth rate over the last five years. This was below our standards. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Cisco’s margin dropped by 5.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Cisco’s free cash flow margin for the trailing 12 months was 23%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Cisco’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Cisco isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 17.6× forward P/E (or $68.40 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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