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TheStreet Open House

Cisco Could Lag Peers as Economy Rebounds

SAN JOSE, Calif. ( TheStreet) -- Cisco Systems (CSCO) helped give the market a shot in the arm last week when it posted better-than-expected quarterly results.

The San Jose, Calif.-based company reported a profit of 36 cents a share for its fiscal first quarter, topping the 31-cent estimate of analysts. Sales sank 13% to $9 billion, beating expectations for $8.7 billion. Unlike some companies that relied on cost cutting to exceed estimates, Cisco managed to stabilize its sales.

Cisco's products make up the bones of computer systems. Its strong results suggest spending is ramping up as companies look to upgrade infrastructure, a sign that the economy may be improving. Sales projections for a 1% to 4% gain during its current quarter probably left some investors wondering whether they should expand their holdings.

There are several reasons for investors to jump on Cisco shares, which we rate "buy." With a price-to-earnings ratio of 16 versus an industry average of 31, the stock is cheap. Tech companies traditionally trade at elevated multiples because of their growth potential.

The stock has run up 37% during the past year, beating the S&P 500 Index's 22% gain, but trailing the 50% advance of the S&P 500 Information Technology Index. It's the fourth-best performing member of the Dow Jones Industrial Average this year. With a beta value of 1.2, the stock is not much more volatile than the broader market.

Big investments in research and development usually hurt tech companies' balance sheets, but Cisco's financial position is enviable. A current ratio of about 3.4 and low debt make it fairly secure.

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