The Best Tech Stock Money Can Buy

About a week ago, a press release announced that the University of Virginia Press would be making tens of thousands of writings and documents from the nation’s Founding Fathers available on the Internet. By 2012, instead of having to rely on what was written about George Washington or Thomas Jefferson, individuals will be able to read their original thoughts on many important subjects.

The news is of obvious excitement to historians and other history buffs, but also serves as yet another indication of the growing importance of digital technology to businesses and society as a whole. Websites and social networks are other examples and mean continued leaps in demand for storing and retrieving increasing amounts of digital content.

Tech giant Cisco (Nasdaq: CSCO) frequently talks about “the human network,” which it defines the most important asset in the information technology (IT) industry. It defines this network as “the platform to change the way the world works, lives, plays, and learns.” This statement definitely may be advertising fluff, but it also happens to be a good way to identify the vast array of markets the firm’s products address to make it a reality.

#-ad_banner-#Cisco logged $40 billion in revenue last year and builds networks feeding off the convergence of networking, computing and storage of data, be it for personal or corporate use. Routing and switching, which includes products such as data center switches, is Cisco’s bread-and-butter business and still at the forefront of its product offerings. But the company has also evolved into fields like smart grids, virtual healthcare and teleconferencing via Cisco TelePresence, just to name a few.

That Cisco can continue to expand after nearly two decades of breakneck expansion speaks to just how much industry growth remains. It already boasts more than 1,700 global customers, while switching revenue grew +12% last year in what was otherwise a down economy. Acquisitions also play a key component of management’s focus to build, buy and partner its way to growth. Last year, Cisco acquired Tandberg to beef up its videoconferencing abilities, and has also been on the bandwagon to acquire web security firms.

Cisco has grown sales at close to an average of +8% annually in the past decade, while earnings have grown nearly +14% each year. Keep in mind that Cisco has accomplished this through two major recessions that included a technology stock bubble and global credit crisis, which speaks to the fact that Cisco is somewhat recession proof, given the consistent demand from its underlying markets. Profits are also stellar and operating margins are consistently above 20%.

Cisco is also very financially sound. As of the end of its most recent quarter, the firm had nearly $40 billion cash on the balance sheet. Subtracting out the company’s long-term debt of $12 billion leads to a net cash position of some $28 billion — a significant war chest to pursue acquisitions, repurchase stock and perhaps pay a dividend, which is apparently close to happening.

Action to Take —> Analysts project Cisco to post $45 billion in sales this year — a +13% increase compared with the previous year. The consensus earnings projection is $1.73 per share, which puts the forward P/E at under 14. The trailing free cash flow multiple of less than 15 is also quite reasonable.

Overall, at the current share price, valuation, and expectations for compelling growth going forward, Cisco thinks it can grow between +12% and +17% in the longer term. And for Cisco, every quarter leads to billions more in excess cash that will at some point need to be deployed prudently, so it’s only a matter of time before more shareholder-friendly moves come to fruition. For these reasons, Cisco is the best tech stock money can buy in the market today.

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