Investors Should Give Cisco Another Chance

TheStreet.com

SAN JOSE, Calif. (TheStreet) -- This time last year Cisco was the sick man of Silicon Valley, weighed down by execution issues, weak consumer spending and fierce competition. Fast forward 12 months, though, and the rejuvenated networking giant deserves investors' attention.

"We continue to believe Cisco is an underappreciated turnaround story similar to what we have seen with Apple, IBM, and EMC in the past," noted Sterne Agee analyst Shaw Wu, in a recent note.

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Cisco CEO John Chambers.

Recently cited by J.P. Morgan as a "safe haven for communications equipment investors," the gear maker is certainly attracting plenty of positive attention ahead of its second-quarter results, which will be released after market close on Wednesday.

The average estimate of analysts polled by Thomson Reuters is for a profit of 43 cents a share in the December-ended quarter on revenue of $11.23 billion. An in-line performance would be up from revenue of $10.4 billion and earnings of 37 cents a share in the same period last year.

J.P. Morgan notes that the weakness Cisco suffered in 2011 is unlikely to be repeated in 2012, and predicted more robust federal spending.

Sterne Agee's Wu also expects good second-quarter numbers. "Checks indicate stable demand trends - in terms of product segments, we are picking up fairly stable demand trends in routing (16% of revenue), new products (30%), services (20%), and even switching (30%)," he said.

Wu explained that product refreshes, such as the new versions of Cisco's Catalyst and Nexus switches, are helping boost sales. "In addition, we are seeing healthier trends in service providers driven by 4G LTE investments," he added. "In terms of geographies, we are seeing better tone in the Americas (59%) and Asia-Pacific (16%), offset by mixed trends in Europe (25%)."

Cisco underwent a massive corporate overhaul last year, which involved layoffs and widespread restructuring, in an attempt to get back on track. Now leaner and meaner, Cisco says that all the upheaval is paying off.

"In every major market transition we have historically emerged stronger," explained Cisco CEO John Chambers, during the company's first-quarter earnings call on Nov. 9. "We're well on our way to doing this again."

After tumbling almost 11% in 2011, Cisco's shares have climbed nearly 12% in 2012, reflecting the company's improving fortunes.

Investors, however, will be closely monitoring Cisco's results for evidence that the switch maker is fighting off rivals such as Juniper and HP.

"Whereas some players like Juniper have missed expectations, our channel and customer feedback indicate that part of the reason is likely because Cisco continues to operate with more confidence and aggressiveness, making it tougher for competitors," notes Sterne Agee's Wu.

Juniper cut its fourth-quarter earnings forecast last month, citing weakness in the U.S. service provider market.

Cisco is also dealing with HP's challenge, according to Robert W. Baird analyst Jayson Noland, highlighting, in particular, the networker's success with its UCS server technology. "Cisco continues to win with UCS while HP Networking has lost momentum over recent quarters," he explained, in a recent note.

"We expect shares of Cisco to respond positively to the fiscal second-quarter report," added Noland.

Investors will also be monitoring Cisco's conference call for any hints that the tech bellwether will beef up its dividend. Consumer advocate Ralph Nader recently urged Cisco to rethink its dividend strategy, slamming the firm's "paltry" quarterly dividend of 6 cents per share.

--Written by James Rogers in New York.



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