Why Cisco Is Regaining Its Dominance

Nov. 8.11 | About: Cisco Systems, (CSCO)

If you’ve closed your eyes you might have missed the remarkable performance of one of the hottest stocks in the market over the past three months. The rebirth of Cisco (CSCO) is clearly under way and investors are beginning to take notice.

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One of Cisco’s major challenges has been dealing with how it is perceived in the market. Prior to its turn-around where its saw a low of $13.30, investors sought to unload shares of the company as it struggled to find its identity. Since then the stock has surged 36% while announcing its presence with authority.

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Cisco will report its Q1 fiscal 2012 earnings results on Wednesday November 9. I am eager to see if it can continue this momentum. 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 (JNPR), Hewlett-Packard (HPQ) and Riverbed (RVBD) encroach on its market share. This is why I was pleased when John Chambers finally said enough was enough.

As far as I am concerned, in the routing and switching space there has always been Cisco and everyone else. But if we use the recent results of its competitors as a gauge, investors may have both optimism and cynicism. Shares of Juniper plummeted when it reported numbers that missed estimates a couple of weeks ago. Juniper also guided lower and offered a disappointing Q3 view, citing problems with timing of orders from service provider customers, and general macroeconomic jitters. This is a stark contrast to competitors such as F5 (FFIV), which not only beat its earnings estimates, but also guided upward. So this leaves me to wonder which path Cisco will follow.

On average, analysts are expecting Cisco to report earnings of 38 cents a share on $10.98 billion in revenue. In the same quarter a year ago, Cisco reported net income of $1.9 billion, or 33 cents a share. It had $10.8 billion in net sales. Hitting these targets would make a nice impression on the market considering the recent results of the competition.


As the stock continues to march towards what I think will be a $25 target over the next three months, patience with Cisco continues to be the best play at the moment. I think the company can still grow revenue by more than double digits for fiscal 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.

Even with 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.

Disclosure: I am long CSCO.