By Callum Turcan and Brian Nelson, CFA
In alphabetical order by ticker symbol: CSCO, INTC, JNJ, PYPL
Cisco Systems Inc (CSCO) announced on December 16 it was acquiring Exablaze, and the deal is expected to be completed in the third quarter of Cisco’s fiscal 2020. Financial terms weren’t disclosed. For reference, Cisco’s first quarter of fiscal 2020 ended on October 26, 2019. Australian-based Exablaze offers services to high-frequency traders by designing and manufacturing “advanced network devices aimed at reducing latency and improving network performance” and Cisco plans to integrate Exabalze’s technology into its own offerings. That will allow Cisco to offer its customers better field programmable gate array (‘FPGA’) technology and beyond high-frequency trading, there’s plenty of room for upside by applying this technology to other realms of financial services, along with big data analytics, AI-computing purposes, and other arenas.
Very recently, shares of CSCO are showing signs of life and have room to run given that Cisco is trading at the low end of our fair value estimate range. Our fair value estimate sits at $56 per share, comfortably above where Cisco is trading at as of this writing, as we view Cisco’s dividend coverage as phenomenal. Shares of CSCO yield 3.0% as of this writing. The company’s Dividend Cushion ratio of 2.8x allows for Cisco to earn both an EXCELLENT Dividend Safety and Dividend Growth rating, as its dividend growth trajectory remains rock solid. We continue to like Cisco in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios.
Intel Corporation (INTC) announced on December 16 that it was acquiring Habana Labs for $2.0 billion. Habana Labs is billed as “an Israel-based developer of programmable deep learning accelerators for the data center” and through this acquisition, Intel sees itself better able to capitalize on a growing market supported by secular growth tailwinds. By 2024, Intel sees the total addressable market (‘TAM’) for AI silicon reaching $25.0 billion, and AI silicon demand from data centers is expected to be greater than $10.0 billion over this timeframe.
Management mentioned Intel’s AI-driven revenue is expected to be up more than 20% year-over-year in fiscal 2019 (fiscal 2018 ended on December 29, 2018), reaching $3.5 billion. Growth is driven by rising demand from “hyperscale” customers, and going forward, “Habana’s Gaudi AI Training Processor is currently sampling with select hyperscale customers” which offers room for further upside. Intel’s outlook is supported by the company’s push into new growth markets with an eye towards AI, the Internet of Things (‘IoT’), and semi-autonomous/autonomous driving.
We continue to like Intel as a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios, with the top end of our fair value range estimate sitting at $61 per share. As of this writing, Intel is supported by favorable technicals (and strong fundamentals), and shares of INTC yield 2.2%. Intel’s Dividend Cushion ratio of 2.1x allows for a stellar dividend payout growth trajectory (we rate Intel’s Dividend Growth rating as EXCELLENT) and its GOOD Dividend Safety rating is solid.
Johnson & Johnson (JNJ) appears to be on the verge of breaking out to new highs after a strong past few weeks. The company recently received an upgrade from Morgan Stanley (MS), and while we don’t pay too much attention to sell-side rating changes, we think this one is particularly timely as it could set the foundation for a technical breakout. J&J faces a number of uncertainties as it relates to contingent liabilities, not the least of which are related to its talc products, but the market is well aware of the risk.
Though it is hard to handicap the probability and magnitude of impact associated with contingent liabilities in the valuation context, we think our fair value range captures a lot of that uncertainty. In such a context, even after J&J’s strong run of late into the mid-$140s, we anticipate upside to $150+ on the basis of our fair value estimate and north of $180 at the high end of the fair value range. We continue to like shares of J&J, especially as fundamental momentum continues, with the firm raising guidance as recently as mid-October.
Image shown: J&J’s stock looks poised to break out to new highs as a result of considerable strength the past few weeks. We continue to like shares.
PayPal Holdings Inc (PYPL) and Citigroup Inc (C) announced on December 16 that both parties have decided to expand their relationship. Starting in the first quarter of 2020, Citigroup’s institutional clients will be able to pay directly into PayPal’s digital wallet through Citigroup’s WordLink cross-border payment platform in more than 200 markets. Here’s an excerpt from the press release;
“The extended partnership brings together Citi’s large global network and client base of multinational corporations, financial institutions, and public sector organizations and PayPal’s vast two-sided network of consumers and businesses, delivering more choice and flexibility to Citi and PayPal customers…
Citi and PayPal’s payment partnership highlights a shared vision to create a large interconnected ecosystem of global businesses and consumers that can make and receive fast, flexible and secure payments for commerce. Both Citi and PayPal have developed the partnership with the goal of making payments as simple and digital as possible, while offering choice and flexibility for customers at all times. Starting in the first quarter of 2020, Citi clients will be able to make payments into PayPal wallets globally in more than 200 markets.”
Effectively, Citigroup and PayPal are teaming up to offer a truly digital payment platform supported by expansive cross-border, foreign currency, and payment processing solutions. We continue to like PayPal as a holding in our Best Ideas Newsletter portfolio and see shares of PYPL trading at a significant discount to our fair value estimate of $125 per share as of this writing.
Communications Equipment Industry – CSCO JNPR KN NOK SMCI
Broad Line Semiconductor Industry – AMD AVGO FSLR INTC TXN
Integrated Circuits Industry – ADI MCHP MRVL NVDA SWKS TSM XLNX
Financial Tech Services Industry – MA MELI PYPL VRSK V
Related: C, MU
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Callum Turcan and Brian Nelson do not own shares in any of the securities mentioned above. Cisco Systems Inc (CSCO) and Intel Corporation (INTC) are both included in both Valuentum’s simulated Best Ideas Newsletter and Dividend Growth Newsletter portfolios. PayPal Holdings Inc (PYPL) and Visa Inc (V) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.