Cisco Systems Vs. Coca-Cola, Big Iron Vs. Sugar Drinks, John Chambers Vs. Warren Buffett. These aren’t typically compared to each other, but that’s exactly what I’m going to do for you. Why? To show you where there is truly value and where there truly isn’t. This is actually more of an apples to apples comparison than you think.
Let’s just start by acknowledging that Cisco and Coke are completely different businesses. Coco-Cola is over 125 years old, Cisco is about 28 years old. Coca-Cola has survived just about every type of market you could imagine, from the Great Depression to WWII to everything in between. And it’s still around and flourishing. Cisco doesn’t have the long track record, but that doesn’t mean anything at the moment.
This is about a company’s stock price, not about the company itself. They are two completely different things, even though they shouldn’t be. You could have a great company trade at a ridiculously low p/e, or money losing company with a ridiculously high p/e. In this case we have two great companies, but we have a huge difference in valuations between the two.
Let’s break it down.
As you can see this isn’t really even close. Cisco is basically trading at a 40% discount compared to Coke, yet Cisco generates more income per year, more revenue, has $32.4 billion in net cash compared to Coke’s negative $6.5 billion net cash position, and Cisco pays a higher dividend. Cisco also has a better growth profile.
So what is going on here? Well this just comes down to two things, Cisco is undervalued at the moment and Coke is overvalued. Fair value for both is somewhere in the middle, around $140 billion. While there is no question that Coke’s brand carries a huge premium, probably $70 billion or so, the shares are still overvalued. Despite what you have heard, there is a bubble in dividend stocks like Coke, Walmart, etc. That doesn’t mean it will deflate anytime soon, as they could simply be pricing in future inflation.
Coke’s balance sheet has been deteriorating the last few years as the company buys up brands. They are paying a big price for this growth though, as debt keeps increasing. Cisco balance sheet on the other hand has been getting stronger the last few years, as their net tangible asset value has gone from $24 billion in 2009 to $32.3 billion today. Compare that with Coke’s net tangible asset value, which went from $12 billion to $4.5 billion during that same time.
The bottom line is Coke is paying for growth at the cost of its balance sheet. Cisco has been trying to grow internally, as its balance sheet strengthens. Investors need to understand that there comes a point where it’s not worth paying a high price for a company’s stock, even if the company has been around for over 125 years.
Full Disclosure: I currently hold no positions in Cisco(CSCO) or Coca-Cola(KO), but a family member owns shares of Cisco(CSCO).