Cisco: Now's A Great Time To Get In

| About: Cisco Systems, (CSCO)

by Robert Gordon

Dow 30 component Cisco Systems (NASDAQ:CSCO) has fallen into difficult times. Its stock price is currently 20% of where it was decade ago, and the company overall has the look of being old and tired. But at its current price, there may be room for "bottom fishing." I am going to take a look at its most recent quarter earnings, which ended April 30, 2012, to try to see signs of life from this internet infrastructure giant.

Cisco's fiscal year ends in late July, so when writing of the fiscal quarter that ended in late April, I will be writing about the company's third fiscal quarter. In that period, the company actually reported record revenues and profits. Revenues increased seven percent over the third fiscal quarter of 2011, to $11.6 billion. GAAP profits in the quarter came to $2.185 billion, or $0.40 per share, a 20% increase from the year ago quarter. Adjusted earnings came to $2.605 billion, or $0.48 per share, a 14% advance from the year earlier adjusted earnings amount. But the Street ignored the earnings report, instead focusing on the company's future.

Despite the otherwise excellent numbers in the quarter, Cisco gave some warnings about its future. Specifically, CEO John Chambers predicted revenue and profit increases slowing going forward, due to macro-economic issues such as stagnation in Europe, slowing growth in China, and generalized uncertainty in America. Chambers sees revenue growth overall slowing to 2% to 5% growth next quarter, and adjusted earnings of $0.44 to $0.46 per share. Due to the sluggishness suggested by Chambers, Cisco stock plunged despite the quality third quarter earnings.

Quarterly earnings numbers aside, Cisco has tremendous market positions in various categories around the world. During the first quarter of 2012, it held an 85% worldwide market share of the access routing network and a 70% share of the LAN switching market. It has substantial "cloud" technology, and will have a worldwide role in the build out of cell phone 4G LTE networks.

Cisco also has a very clean balance sheet, which it took advantage of earlier this year in its $5 billion dollar acquisition of NDS. The deal will strengthen Cisco's video capabilities in Europe and Asia. Cisco still has some $48 billion of cash and cash equivalents on its balance sheet, and other accretive acquisitions will undoubtedly be made.

I choose to look at Cisco as a value play. At its current $16 per share, it has a price to earnings ratio of 8.8, and a 5 year PEG of 1.0. It is selling now at a 24% discount to where it was two months ago. It offers a dividend yield of 2.0%. Main competitor Juniper Systems (NYSE:JNPR) has a much higher price to earnings ratio, and higher PEG as well, with no dividend. I believe the market has punished Cisco unfairly and unduly harshly. This company will survive, and may even thrive if the European Union figures its way out of its morass. Today is a great launching point, price-wise, for this top tier technology company.

Alcatel-Lucent (ALU) is also in an intriguing valuation situation play. While Jim Cramer calls Alcatel a "terrible company" and that investors would do better just "buying a lottery ticket." He overlooks some possible headway for Alcatel. Its new series of routers are more dense, and more energy efficient than anything from Juniper or Cisco. While Cisco has long term relationships with governments and other enterprises globally, those relationships are unlikely to withstand an inferior product.

It would appear from Alcatel's "barely there" stock price that the Street has pretty much given up on Alcatel. Not so fast. In addition to its new advanced routers, Alcatel has won some recent contracts, such as in West Texas. The company has a trailing price to earnings ratio of 3.1, and a forward ratio of 8.8. If the company can turn its new routers into actual revenues and profits, we will look back upon this time as a great opportunity. Alcatel is not for conservative investors, of course, but if you can afford to take a risk, Alcatel has leverage and possibilities on its side.

Another company in the industry I see with some upside potential at current valuation is LSI (NASDAQ:LSI-OLD). It designs and markets storage and networking semiconductors worldwide. As such, it is being buffeted by the same ill winds from Europe as other worldwide companies. Nonetheless, it has met or beat analysts' expectations each of the last four quarters. In the first quarter of 2012, revenue came to $622 million. Management is expecting $630 million to $670 million in the current quarter. Earnings in the first quarter came to an adjusted $117 million, or $0.20 per share. This was double the year ago adjusted earnings, and over 40% above analysts' expectations. Management is looking for adjusted current quarter earnings of about $0.18 per share.

LSI's main hurdle is overcoming its decision to get out of the external storage systems business, which it sold in the second quarter of 2011. That business represented some $700 million of annual revenue, but growth in that sector was straggling behind the rest of the company. LSI instead is betting its future on cloud computing, solid state drives, and wireless infrastructure. Analysts have a one year target of $11.04, which represents a 70% gain from the current price at about $6.50 per share. I am not alone as a fan of LSI; so is Jim Cramer. I believe this is a winning play for the growth investor, especially since LSI's stock has fallen by a third since mid-March.

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