Why Cisco Systems Is Still Worth the Wait

| About: Cisco Systems, (CSCO)

They say that “patience is a virtue." And if you are a person like I am who has been practicing such virtuous qualities by holding onto Cisco Systems (NASDAQ:CSCO) shares over the past several years, then among your disappointment, you might qualify to write a book about both virtue and frustration.

I'm beginning to realize that my reward for being long Cisco over the years may not be realized for quite some time. Admittedly, it may be my frustration speaking, but I have become concerned of what other opportunities I might have missed by being so stubborn. I keep thinking “this is it, this is the time they turn things around." It sort of reminds me of a domestic situation that never improves. But then I go back to my virtues and wait.

If Cisco can wisely reinvest its capital to create more innovative ways to compete, I feel investors, patient or not, will be rewarded handsomely. Because at the current level that the stock is trading, I see an opportunity for those who are looking for value and are willing to be patient to realize some significant gains.

I think this stock has been beaten to the degree where I feel that it is now grossly undervalued. Cisco said last week that the company plans to “slim down” and “tighten its focus” on its core areas in an attempt to get profits growing again. Critics have called the company too scattered in its efforts while it faces tough competition in core products such as its routers and switches.

In a research report, Shaw Wu at Sterne Agee said he had separately analyzed the value of Cisco's major segments: Routers, switches and a variety of "new products" and services. Adding them back together he arrived at a value of $27 to $28 per share, even when discounting the price-to-earnings ratio compared to its competitors.

"We believe the (Cisco) story is getting better and we'd rather be a buyer at these depressed levels than wait for obvious evidence of improvement. By then it may be too late," Wu wrote.

It continues to be a major challenge to not value Cisco, by any measure. Its equipment still powers more than half the Internet. But due to some poor decisions in its failed attempt to enter the home consumer market, the company had to deal with poor performance results, many of which allowed the likes of F5 Networks (NASDAQ:FFIV) and Juniper (NYSE:JNPR) to catch up in the routing and switching space.

Speaking of the competition, in the most recent quarter, F5 posted a respectable fiscal 2011 earnings per share of 68 cents, beating the Zacks Consensus Estimate of 66 cents. The outperformance was attributable to solid revenues fueled by the growing demand for the company’s products, as well as market share gains. In fact, according to Zacks, its solid execution and focus on enterprise and service providers have positioned F5 Networks well in the application delivery controller market and helped it take share from Cisco while remaining keen on expanding its cloud exposure.

If F5’s success wasn’t so bad, add to the that fact Juniper Networks is also growing rapidly. This makes for some important times in isolation and second guessing whether my patience continues to be virtuous or just plain stupid.

For years it has been the biggest debate. Who is better, Cisco or Juniper? By the recent price action of both firms, I think it is clear that investors have made up their minds. Juniper’s stock has surged about 74% since its 52-week low last July, trading last week at just under $40. Whereas, Cisco shares are down 21% over the same period, languishing at just under $17. But the debate continues and (like all things) only time will tell which company will come out on top.


I have to be honest and wonder how much more time am I willing to give Cisco. I think the company can still grow revenue by more than double digits for fiscal year 2011 and 2012. With that, I would expect earnings to grow at the same rate. Interestingly, I can’t help but to think I am in the minority on this opinion. By the recent performance on the stock, I think it is fair to say that Cisco continues to have its skeptics on Wall Street.

This is a stark contrast for one of Wall Street’s former “darlings” which could do no wrong in the late 1990s. But by management’s sudden attention to refocus on its core business, I think Cisco deserves some more time to prove its skeptics wrong. Wow! Did I just ask that investors remain patient?

Disclosure: I am long CSCO.