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Last week I asked Cisco (NASDAQ:CSCO) if it is ready to deliver for shareholders. I asked that question rhetorically with full knowledge of that is precisely what it intends to do.

On Thursday UBS upgraded shares of the company to buy from neutral with a price target of $19.75. I guess the bank doesn’t think it will do enough to warrant an extra 25 cents for an even $20, but that’s another matter. Upon issuing his upgrade, analyst Nikos Theodosopoulos suggested the following:

  • Peer company results suggest “networking demand is solid in the U.S. and stable in Europe,” and adds that “in the near-term we see Cisco as a beneficiary of these trends.” He adds that he now sees estimates for Cisco as “reasonable,” noting that the Street now sees FY 2012 earnings of $1.70 a share.
  • In the near-term competitive pressures are easing for Cisco; he thinks the company can stem and reverse recent share losses. “Checks show CSCO is benefiting in Switching and Blade Servers vs. Hewlett-Packard given HP’s organizational/strategic issues, at least in the short term,” he writes. “Cisco is likely facing less intense pricing pressure, and may experience more favorable switching and blade server market share trends near-term.”
  • The company is likely to increase its focus on returning cash to holders. In particular, he thinks Cisco will take advantage of low interest rates by raising debt to facilitate higher dividend and to maintain its share repurchase program.

To address the points above, I would have to agree. We have seen evidence of this by Cisco’s Q4 earnings results which then beat analysts’ estimates by a respectable margin. Then on Wednesday one of Cisco’s chief rivals F5 Networks (NASDAQ:FFIV) released numbers that also topped even the highest projections where it saw its Q4 revenue jumped to $314.6 million, while non-GAAP earnings per share came in at $1.06. On average, the Street was looking for sales of $308.5 million and earnings of $0.98 per share. Not to be outdone, its gross margin rose slightly to 82.2% from last year's 81.5%.

As for Cisco, the company just announced the date of its Q1 fiscal 2012 results, scheduled for Wednesday, November 9, 2011, at 1:30 PM. In its most recent announcement, excluding some costs, it reported profits of 40 cents a share compared to the expected 33 cents.

Sales rose 3.3% to $11.2 billion in the period, which ended July 30, compared with an estimate of $10.98 billion. These were remarkable numbers considering the many instances when I watched the aforementioned F5, along with the likes of Juniper (NYSE:JNPR), Hewlett-Packard (NYSE:HPQ) and Riverbed (NASDAQ:RVBD) encroach on its market share. This is why I was pleased when John Chambers finally said enough was enough.

So clearly networking demand is once again picking up and it is showing in Cisco’s recent share price, one that now sits respectably at $18 after dropping below $14 in August. I can’t help but credit the company’s recent success to its earlier re-dedication to its core routing and switching business as well as streamlining its decision making process.

Though I questioned the merits of laying off 6,500 of its employees, as tough of a decision that was to make, it is one that has so far proven to be correct. Having now seen the results of some of these decisions I’m starting to think maybe it is possible for Cisco to once again become a growth company, one that have strengthened my previous assessment that Cisco is a great value at current levels as opposed to its perceived “value trap."

One of the challenges for Cisco will be how to re-invest its capital to create more innovative ways to compete. 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.

Summary

It continues to be a major challenge to not value Cisco, by any measure. Its equipment still powers more than half the Internet. One can continue to argue that there is no other company that has been able to leverage its balance sheet better than Cisco and one that can still potentially deliver another 20% premium in its stock from current levels by the end of the year. As tempted as I have been to sell some of my stake, I plan on holding for a while longer for what I feel will be a stock trading in the mid $20s by the end of Q1 2012.

Source: Cisco's Remarkable Turnaround: It's Only The Beginning