Has Cisco finally turned the tables?

For years, it looked like the networking giant was a stodgy old technology name that time had passed by.

By Benzinga Nov 10, 2011 2:21PM
By Jonathan Chen, Benzinga Staff Writer

Cisco Systems (CSCO) shares jumped 7% in midday trading Thursday after the company reported better-than-expected earnings and guided second-quarter earnings higher. The company appears to be turning the ship.


The San Jose, Calif., company reported first-quarter earnings of 43 cents per share on $11.3 billion in revenue. Wall Street was looking for earnings of 39 cents per share on $11.02 billion. The company also beat on gross margins, coming in at 62.4% versus estimates of 61.3%.


Cisco said it expected second-quarter earnings of 42 to 44 cents per share, higher than estimates of 42 cents per share. Revenue is expected to tick up 7% to 8% to come in at $11.14 billion to $11.24 billion. Wall Street was looking for $11.13 billion.


"We delivered a solid quarter," said chief executive John Chambers in a statement.


A slew of research firms, including Goldman Sachs (GS) and Citigroup (C), raised price targets on the company after the earnings report.


Citi was extremely positive, saying that Cisco was led by "solid execution, accelerating order growth and balanced strength across geographies." Analysts there believe 2012 will be a good year for the stock. 


"With the bar for 2Q set relatively low, its core business inflecting, and a upward bias to estimates (and limited downside EPS risk), we believe Cisco is setting up for both top-line growth reacceleration and margin stabilization, which in-turn will likely lead to multiple expansion for the stock," analysts wrote in a note.


For years, Cisco looked like a stodgy old technology company that time had passed by. Revenue growth was slowing or even negative, and people were getting their services and software elsewhere, especially as cloud computing has become even more important. But last quarter, it appeared that Cisco turned the corner. The quarterly earnings results and the subsequent guidance for the current quarter only further confirm that hypothesis.


Chambers has historically been a straight shooter with the press and analysts, and his better-than-expected guidance means the company is actually seeing demand for its products. It is not blowing smoke at investors. 


Wunderlich said in a research note that "execution continues to improve and service-provider order growth of 16% implies some market share recovery." That does appear to be happening.


The company has a whopping $40 billion in cash overseas, which should support the share price on any dips. Shares are cheap for a company growing revenue at about 8% year-over-year, while trading at less than 10 times expected 2012 earnings. The company also has a 1.3% dividend yield, and with that $40 billion in cash, there is the potential for additional dividend hikes in the coming quarters and years, to help further support the share price.


Cisco will never be the high flying stock it once was, but Chambers does look to have turned the corner with the company.


Pretty hard to do with a ship the size of the Titanic.


ACTION ITEMS:

Bullish:
Traders who believe that Cisco has bottomed might want to consider the following trades:

  • Look at the optical networking names that are dependent on Cisco. Oplink Communications (OPLK) is a name to consider.
  • Consider higher-growth competitors to Cisco, Juniper (JNPR), and F5 Networks (FFIV), whcih should benefit on data centers being above expectations.

Bearish:
Traders who believe that Cisco is still scrawling around the bottom may consider alternate positions:

  • The conference call went well yesterday and expectations for Cisco are starting to rise. If the company can not not deliver on what it promised, Cisco will continue to be dead weight. 

Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security. 


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