Cisco Proves Again Why It Deserves A $30 Price Tag

| About: Cisco Systems, (CSCO)

They say you never get a second chance at a first impression, but for network equipment giant Cisco (NASDAQ:CSCO) its sudden rebirth just might be enough to refute that notion. Admittedly, I've been a long time cheerleader of the company, yet one of its biggest critics - so it's been a long relationship of love and hate. But when a company the caliber of Cisco, which has been at the top of the mountain and takes a swift fall from grace, there's a lot to be said when it demonstrates the level of execution needed to inspire the idea that "a first chance at a second impression" just might be good enough.

The Quarter That Was

On Wednesday, the company reported earnings that beat Wall Street estimates for the third consecutive quarter. It was precisely this anticipation that prompted me to suggest that the stock was on its way to $30. Cisco reported net income that climbed 44%. In the fiscal second quarter, which ended January 28, net income arrived at $2.2 billion, or 40 cents per share - this compares with earnings of $1.5 billion, or 27 cents per share year-over-year.

If you factor out that the costs associated with stock-based compensation as well as some acquisition-related amortization, the company actually earned 47 cents per share - 4 cents per share above analysts' expectations based on polled by FactSet. Revenue was $11.5 billion, up 11% from $10.4 billion a year ago and compares favorably to the $11.2 that was projected.

Looking Ahead

As great as these numbers were, the company is far from being done with strategic planning. CEO John Chambers announced that he expects revenue in the current quarter jump 5% to 7% while also expecting earnings, excluding items, of 45 cents to 47 cents per share. Furthermore, the company said it will raise its quarterly dividend on the one year anniversary of its first pay. The company paid a dividend of 6 cents a share last April whereas the increase will be 2 cents bringing the payout to 8 cents per share - or an increase in the annual yield of 1.6% at Wednesday's closing stock price.

The company deserves a tremendous amount of credit for what it has been able to accomplish in a relatively short period of time. Since reaching its low point last year, in August at $13.30, the stock has climbed a remarkable 54% to just over $20 and there is plenty evidence to suggest that $30 is right around the corner. But the company's recent success has not come easy. The leaner looking and more confident Cisco is a product of a transformation that involved a drastic cost-cutting program designed to save the company $1 billion in annual expenses. While the program included the elimination of 10,000 jobs last year, it seems the company is now ready to start hiring again as evident by the company having added 400 employees alone in the latest quarter.

The company also announced that it has started to consider more acquisitions since it now appears that it has resumed running its business effectively. However, I'm not yet to quickly proclaim that this is a good idea. While there are significant signs of improvement and indeed plenty about which to be optimistic, the competition from Juniper (NYSE:JNPR) as well as Hewlett Packard (NYSE:HPQ) should not be underestimated - particularly with HP seemingly having turned the corner under Meg Whitman. But what I think will give Cisco the edge is to make a strategic acquisition of one of its competitors - Brocade Communications (NASDAQ:BRCD). I've said this recently and I think it makes perfect sense. If nothing else, just to keep it out of the hands of rival Dell (NASDAQ:DELL).

The bottom line is, technology is once again a safe place to invest at the moment. If you want to break it down a bit further, in networking it continues to be Cisco and everyone else. Considering where the stock has risen from, I continue to think that the downside risk is very limited with respect to the cash and other strong fundamentals of the company. Its forward P/E is right at 10 and (to me) that implies a safer earnings risk when compared with several of its peers - namely Juniper, which might be a tad more vulnerable due to its high P/E and also the fact that Cisco has shown that it is becoming more aggressive in terms of market share and pricing.

Summary

Clearly the company is not out of the woods just yet. There are still challenges that lie ahead, but I now have several reasons to expect a continued rise not only in the company's execution but also in its share price. Even on the most bearish assumptions, this stock should easily approach the $25 mark before the end of Q2 and $30 by the end of the year.

Disclosure: I am long CSCO.