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Cisco Looks Strong Ahead of Earnings

Richard Saintvilus

NEW YORK ( TheStreet) -- After starting off the year trading at $19.36 per share, Cisco's has soared by as much as 37%. It's taken almost two years, but the Street finally seems warm to the idea that the networking giant can still be a growth story, if not a dominant cash-flow generating machine.

In that regard, I don't believe Cisco's management has gotten the credit it deserves, particularly CEO John Chambers, who has gotten more than his share of criticism. The company has ignored all of the noise, focusing solely on execution. You will be hard pressed to find a company in any sector that is executing better than Cisco, which will be going for its tenth consecutive earnings beat.

On Wednesday, after the market close, the company will report fiscal fourth-quarter and year-end results. The Street will be looking for earnings per share of 51 cents for the quarter, which would represent 8% year-over-year growth. Revenue, meanwhile, is expected to come to $12.41 billion, or 6% year-over-year increase. Investors are anxious to see if Cisco, which still looks undervalued by 15%, can maintain its momentum.

Unlike recent quarters, the Street has become more bullish on Cisco's expectations, which has seen its stock jump to its highest level in two years. Although Cisco is known for its industry-leading routing and switching businesses, management has been working hard to transition the company out of the hardware mindset, while building up Cisco's capabilities into what is called software-defined networking, or SDN.

What's more, the company has been on a shopping spree -- most recently picking off anti-hacking giant Sourcefire for $2.7 billion. This deal comes amid a slew of other acquisitions for Meraki, Cariden and BroadHop.

In other words, as the hardware businesses continue to erode, management has left no stone unturned looking to diversify Cisco into higher-margin businesses. Given the stock's strong performance on the year to date, the Street loves the changeover.

Without question the Street has bet correctly on Cisco. On Wednesday, I expect that management will outline the company's strategic vision more clearly. I will also be listening very closely to hear what management says about what spurred the deal for Sourcefire, a deal for which I believe Cisco overpaid. Even so, to the extent that Cisco's correct on Sourfire's growth potential, this deal should potentially add an extra 2% (at least) to Cisco's long-term revenue growth.

But I don't believe Cisco was just buying growth. As the company works to become a broader IT supplier with a greater software bias -- a strategy in which Sourcefire fits perfectly -- I expect Cisco's long-term profit margin and cash flow will also get a boost.

The good news here is this company has now created a "bridge" between its weakening hardware business, which has posted soft margins, to its SDN and services businesses, which is expected to outperform for the next three to five years.

Don't mistake this for any assumption that Cisco is suddenly becoming a pushover in hardware. Despite this recent weakness, neither Juniper nor Hewlett-Packard have been able to mount any type of attack. That Cisco's routers and switches still power more than half of the Internet speaks to how superior the products have been and how wide the gap remains between rivals.

Also, when considering that AT&T and Verizon have begun recent 4G upgrades on U.S. wireless networks, it's tough to see how anyone can discount Cisco's hardware position. These upgrades will fuel Cisco's hardware revenue. Investors can't lose.

On Wednesday, I expect both revenue and earnings to be on the upside of the company's guidance, which should propel the stock higher. Let's not forget this stock has shown a history of jumping by as much as 3% following the company's earnings reports, notably in the last two quarters.

But as always, what will determine the stock's overall reaction is how management guides for the next quarter. I wouldn't be so caught up on guidance; it's too narrow-minded. This is still a long-term story. Until anything changes from a cash-flow perspective, which would impact Cisco's long-term revenue growth rate of 5%, this stock remains a strong buy.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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