For Cisco, The Time Is Now

| About: Cisco Systems, (CSCO)

After the bell this Wednesday, Cisco Systems (NASDAQ:CSCO) will announce its fourth quarter and fiscal 2012 earnings. Expectations again vary by analyst, but we do all expect weakness from Europe. We've seen that theme from many names, including Apple (NASDAQ:AAPL) and Priceline (NASDAQ:PCLN). Cisco noted weak European spending on last quarter's conference call, and Wednesday's results should reflect that. But for a stock that has struggled in recent times, this is a quarter where Cisco needs to prove itself. Let's examine where things stand.

Last quarter, as I detailed in May, Cisco issued guidance that was well below expectations. Here's what I described back then.

"Now, the forward guidance is what did in Cisco's shares. The company guided for fiscal Q4 revenue growth of 2% to 5%, a bit below the 7.1% analysts had expected at that time. Currently, analysts are expecting 3.9% growth. Earnings per share guidance was a range of $0.44 to $0.46, which was also below street estimates for $0.49. The current estimate is $0.46. Cisco noted on the conference call that European and public sector spending remains weak, and that longer sales cycles and smaller deal sizes are occurring. Fortunately, Europe is not Cisco's largest revenue generator, but any weakness in the region will be felt, and that seems to be why their guidance was so low."

Currently, analysts are looking for revenues of $11.61 billion, which would represent 3.7% growth, slightly above the midpoint of the range that Cisco gave. While there is the possibility that Cisco was very conservative with its guidance, I'd be a little more positive if the analyst consensus was closer to 3%, which would leave more room for a beat. On the earnings per share front, analysts are looking for $0.46, the top end of Cisco's range. Over the past four quarters, Cisco has beaten analyst estimates each time, ranging from 1 to 4 penny beats.

Before I get into some other thoughts on Cisco, I'll briefly touch on some other news in the space. Juniper Networks (NYSE:JNPR) reported better than expected earnings in their quarter, although revenues were just in-line with expectations. The company also issued guidance that was below expectations, but many seemed to be okay with the company's forecast because it could have been worse.

But the big news was that Juniper announced a new partnership with Riverbed Technology (NASDAQ:RVBD). Juniper will license Riverbed's application delivery controller technology for $75 million, and the companies will collaborate on WAN optimization and mobile application acceleration solutions. Additionally, Riverbed announced fiscal Q3 guidance that was a bit above street expectations. Shares of both companies rose on the earnings and partnership news.

So Juniper issued guidance below expectations, and Riverbed issued guidance above expectations. That seems to be how analysts are looking at Cisco going into this week's results. Here's just how a few analyst thoughts recently regarding the name, with the negatives first.

  • RBC Capital Markets' Mark Sue reiterated a sector perform on Cisco and cut his price target from $18 to $17. Sue called Cisco dead money for now, arguing that the company needs a major dividend hike. Sue states that an annual dividend yield of roughly 5% could reverse some of the P/E compression that has pushed Cisco's valuation to just 8 times projected earnings, compared to 10 times for other large tech names. He also believes that competition, from names like Juniper, could take Cisco's gross margins down to 60% over time (from 63% now).
  • Pacific Crest's Brent Bracelin is worried going into Cisco's Q4 report that forward looking guidance could be weak. He stated "Street estimates for flat sequential revenue at $11.6 billion for the October quarter could prove to be too optimistic relative to economic and currency headwinds, even with some incremental benefit from NDS. Similar to last year, we expect Cisco to guide to a 1% to 3% sequential decline, below normal seasonal patterns."

But then just a few days later, Cisco received some positive ratings from a couple of firms.

  • Piper Jaffray upgraded Cisco from Neutral to Overweight and raised its price target from $20 to $22. The firm noted positive channel checks as their main point. They also stated that while the 2nd half of this year looks to be weak when compared to historical trends, they believe it will be better than the first half of 2012. They believe that earnings per share estimates will be lifted, meaning the stock can go higher from here.
  • Goldman Sachs put Cisco on the conviction buy list, with a $24 price target. They also believe 2nd half growth will be better than expected, and that fears of declining margins are overblown. They think that upgrade cycles as well as the NDS acquisition could provide some benefits that many street analysts have not modeled in yet.

So in my view, this is Cisco's time to prove itself. Cisco shares have actually rallied since their post-earnings fall last quarter, up more than $2.50 since the recent low. However, Cisco shares are down about 25% over the past two years. Investors are fed up with the company's performance, and stock buybacks have failed to lift shares and inspire investors. I've been arguing, along with several others, that another weak quarter or two might be it for long time CEO John Chambers, who many wanted to give up his spot years ago. However, Chambers has added many allies to the board, which has kept his spot safe, despite the lackluster performance over the past decade.

As I've stated in many of my articles, I don't consider Cisco a top tier technology investment at this point. I would rather own Apple for its growth at this point, and Apple's new dividend has almost the same yield as Cisco's currently. My other preferences are for Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) at this point, which have much higher dividend yields, the potential for better growth prospects, and also seem to do well with their share buybacks.

Cisco is up $1 since my latest recommendation on the name, and I'm still saying that the name is a buy, but only after the other names I've recommended. I'm not going to recommend any trade before earnings, but I would say to not jump right in the day after. As we saw last quarter, shares continued downward, even after falling about $2 post-earnings. However, on the flip side, if shares rally after this earnings report, I wouldn't necessarily short it right away. Let's let this name settle down, and I'll examine it again in a week, after we have the results and see some initial movement.

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