Cisco May Finally Be Turning Around

Nov.10.11 | About: Cisco Systems, (CSCO)

By Jonathan Chen

Cisco Systems, Inc. (NASDAQ:CSCO) shares are soaring Friday morning, up 6% as of the time of this article, after the company reported better than expected earnings and guided second quarter earnings higher, as the company appears to be turning the ship.

The San Jose, Calif.-based company reported first-quarter fiscal 2012 earnings of 43 cents per share on $11.3 billion in revenues. Wall Street was looking for earnings of 39 cents per share on $11.02 billion in revenues. The company also beat on gross margins, coming in at 62.4% versus estimates of 61.3%.

The company also guided second-quarter earnings of 42 to 44 cents per share, versus estimates of 42 cents per share. Revenues are expected to tick up 7 to 8 percent, $11.14 billion to $11.24 billion. Wall Street is looking for $11.13 billion in revenues.

"We delivered a solid quarter," said John Chambers, Cisco's chairman and CEO:

We've completed the majority of our restructuring and have organized Cisco to successfully execute against our strategy of providing intelligent networks, architectures and integrated products that solve customers' business problems. Even in times of limited capital spending, intelligent networks are being deployed to drive new business, revenue and consumption models, enable new customer and employee experiences, and drive efficiencies. Cisco's leadership in networking, video, collaboration and cloud, offered together in an integrated architectural approach, uniquely positions Cisco as a strategic business partner.

As such, there were a slew of research firms raising price targets on the company, including Goldman Sachs and Citigroup.

Citi was extremely positive on the earnings release, as the company was "led by solid execution, accelerating order growth and balanced strength across geographies." It also believes 2012 will be a good year for the stock. In the research note, Citi wrote:

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.

For years, it looked like Cisco was the 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. Then, last quarter it appeared that Cisco looked to have turn the corner. This quarter and the subsequent guidance for next quarter only further confirms that hypothesis.

Chambers has historically been a straight shooter with the press and analysts, and for the company to come out with 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," and 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 revenues about 8% year-over-year, 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 again be the high-flying stock it once was in the 1990s, but Chambers does look to have it turning around. And that's 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, Inc (NASDAQ:OPLK) is a name to consider.
  • Consider higher growth competitors to Cisco, Juniper (NYSE:JNPR), and F5 Networks (NASDAQ: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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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