Cisco Posts Turnaround, But Is the Opportunity Real?

Cisco (CSCO) is attracted some value investors on Thursday. After the share price plunged for a brief while to hit a new 52-week low of $21.77, Cisco turned the 6% intra-day decline into a gain of almost 1%, and mid-afternoon was now at $23.21 on some heavy volume of 172 million shares. Trading at a current P/E of 18.50, a forward P/E of 14.5, and with a 7% free cash flow yield, the stock has attracted some buyers. Interpreting the numbers in a wider context, according to the Dow Jones Newswires, Cisco's stock does appear cheap. It is trading at 15 times Wall Street's average estimate for fiscal 2008 earnings, and below the 21 times earnings it traded, on average, in 2007. In comparison, networking rival Juniper Networks (JNPR) trades at 21 times its earnings estimate.

On that basis, Cisco did manage to get some positive comments from a Pacific Crest analyst who upgraded the stock to "outperform" on Thursday morning. But a quandary exists because although the stock may be "cheap," a real opportunity might not be present.

The problem stems from the fact that Cisco issued poor guidance. While the long-term growth forecast is stable at 12 to 17%, third-quarter revenue is expected to grow just 10% compared to the previous estimate of 15%. And there is a risk that the slowdown in orders can be more than temporary. As Chambers alluded to during the conference call, slowing order growth may extend for several months making the upcoming quarters extremely challenging. Be wary.