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Can Cisco Overcome Wall Street's Doubts?

Cisco expects earnings per share of 45 cents to 47 cents on revenue of $11.5 billion to $11.9 billion, in line with analysts' EPS forecasts of 46 cents on $11.7 billion in revenue. The company earned $8.04 billion, or $1.49 per share, for the full fiscal year, an increase from $6.49 billion, or $1.17 per share, in fiscal 2011. This is while revenue arrived at $46.1 billion, up from $43.2 billion in the previous year.

What About Tomorrow?

While no one is expecting Cisco to grow as it did in the mid to late 1990s, there is considerable doubt on the Street that it can grow at all. Providing investors a reason to believe is the company's biggest challenge -- that, and fighting off the competition from F5 (FFIV), Juniper (JNPR) and Hewlett-Packard (HPQ), all gunning for market-share dominance.

I think Cisco's management deserves a lot of credit for ignoring the noise and instead focusing on sound execution. The company has admitted some mistakes, many of which has caused Juniper and F5 and, to some extent, Riverbed (RVBD) to come out of nowhere and establish a presence in that all-important enterprise market.

Nonetheless, despite recent embarrassments about some failed acquisitions, Cisco still owns 60% in its core routing and switching business. This is while HP and F5 recently reported slower than expected market share growth.

It seems management has gotten more realistic about Cisco's operating structure and, better yet, its prospects for growth and returning value to shareholders.

Bottom Line

When assessing Cisco's investment worthiness, one of the first things that I notice is its strong balance sheet, one that carries almost $50 billion in cash. This gives it more flexibility over the competition.

With the level of cash on Cisco's books, even on the most conservative assumptions, the stock should be trading at $25. This assumes a modest 4% annual growth in free cash flow.

At the time of publication the author had no position in any of the stocks mentioned.

At the time of publication, the author held no position in any of the stocks mentioned.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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