Cisco Ready To Maintain $20 Level By 2013

Oct.19.12 | About: Cisco Systems, (CSCO)

Cisco Systems, Inc. (NASDAQ:CSCO) recently unveiled multiple enhancements to its collaborative portfolio. The products include telepresence, web conferencing, unified telecommunications (UC), and contact center solutions. The company reported that the enhancements were a response to the challenge from Chinese firm, Huawei, considered a more significant networking competitor than Hewlett-Packard (NYSE:HPQ).

Due to this initiative and other factors, I believe Cisco is going through a major reorganization and will continue to execute plans to deliver profitable growth. While many investors were spooked by its earning report in November and are doubting the long-term strategies for success, Cisco is responding to the challenge, and 2012 could be its pivotal year.

In my opinion, Cisco is in a good position to succeed for several reasons. First, it has just announced the completion of a 100 G technology test carried out with Megafon, one of the three largest mobile operators in China. Second, it has over the years survived competition from Microsoft (NASDAQ:MSFT), Juniper (NYSE:JNPR), Hewlett Packard, and Intel (NASDAQ:INTC). Third, it invests in the development of new products, which illustrates its strong desire for innovation. And finally, it is squarely at the center of major technological architecture built on integrated products, services, and software platforms to fuel its customers' business.

Cisco recently reported fourth quarter results that showed net sales with a normal increase of 4% to $11.7 billion on a year-over-year basis and a net income increase of 56% to $9 billion on a year-over-year basis. It announced an increase of 64% on earning per share at $0.36. It has developed revenue growth of 7%, as well as a record year in revenue and earning per share.

Apart from this, it announced a 2012 net income with a normal increase of 24% to $8 billion year-over-year, and a 2012 net sales with a normal increase of 7% to $46.1 billion year-over-year. Cash flows were $3.1 billion for the fourth quarter of fiscal 2012, up from $3.0 for the third quarter of fiscal 2012, while the amount for the fourth quarter of 2011 was $2.8 billion. Cash flows from operations for fiscal 2011 was $10.1 billion, but they were $11.5 billion for fiscal 2012.

Cisco, like others, has its problems. One of the most acute concerns a new technology called software-defined networking, which lets customers program from one control console and perform more jobs with fewer switches and routers. VMare bought Nicira for $1.26 billion recently to make foray into the market. Oracle (NYSE:ORCL) bought Xsigo Systems for the same reason. Cisco is having problems because it is finding it difficult to respond to the challenge.

Cisco has also been faced with significant competition in recent years from Juniper Networks and Avaya in the network space industry. Its rivals have been able to take advantage of Cisco's efforts to grow into new markets to steal some market share. For example, while Cisco recently announced its strategy to develop and sell an end-to-end smart grid network product to utilities, Juniper has been quietly focused on providing networking gear to utilities much deeper in the grid.

Cisco also has to cope with Huawei, which last year kicked off an aggressive enterprise business to challenge Cisco not only in networking, but in such areas as collaboration and devices. Added to this, HP, armed with its acquisition of 3Com, made a push into networking due to its strong presence in the business. Arguing that lower prices for a good enough networking infrastructure didn't always pay off, Cisco executives took six to 12 months to respond. This gave HP some advantage in the market.

Despite the challenges, I expect Cisco will come out stronger. Cisco's business units are presently undergoing reorganization. The goal is to cut $1 billion in annual operating expenses. It got rid of the profitable Flip Video camera unit and led to the sale of the T.V. set-top box manufacturing plant in Mexico. I expect these moves to streamline sales, services, and engineering units and result in a more focused and more competitive Cisco.

The company's financial numbers were a mix, but they give indications of a bright future. Sales in the data center equipment business, in particular Cisco's Unified Computing System (UCS), jumped. Although global economic uncertainty hit the company this year, Cisco overcame the challenge; 2,000 more customers signed on for the UCS, bringing the total number of customers to more than 7,400. Cisco's core switching and routing business remained strong, even though other networking companies lost business.

New products made an impact this year. They boosted Cisco's server and data center business, which grew 90%. New wireless routing products helped increase sales by 22% in the division. Though one reason behind the pressure on Cisco's gross margin had to do with new product launches, I expect this problem to come to an end. As a rule, new products start at lower gross margins and grow over a period of time.

One of the reasons behind the rise in net income was the winding down of the company's restructuring charges related to last year's transition. I expect more reduction this year, further boosting net income.

Cisco can be best compared to HP, Juniper, and Alcatel-Lucent (ALU). Cisco has a price to earning ratio of 12.66, lower than Juniper and the industry average. Though its price to sales is 2.13, it is just a little above the industry average and slightly higher than Juniper's. Furthermore, Cisco has moved aggressively to develop new technology and react very well to the challenge of competitors. It has reported better-than-expected results for the second fiscal quarter and issued a relatively positive forecast. It has increased its earning per share.

Cisco should be considered one of the superior income investments in the market. Cisco is currently trading around $18.58, between a 52-week range of $14.96 and $21.30. I think these new enhancements will lead Cisco to maintain a price level of around $20 by the end of 2012 and into 2013. Investors should consider buying Cisco now to take advantage of this.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.