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Cisco's Still a Strong Buy Ahead of Earnings

NEW YORK ( TheStreet) -- Cisco (CSCO - Get Report) will report its fiscal third-quarter earnings on Wednesday. Even though it's no longer the days of the tech bubble, you couldn't tell by the company's recent performances. After overcoming some missteps in execution, the network giant has now strung together eight consecutive earnings beats. Investors are anxious to see if Cisco, which still looks undervalued by 25%, can maintain its momentum.

With uninspiring earnings results from several Cisco rivals because of weak enterprise and government spending, it's anyone's guess what Cisco is going to produce. Not only has the U.S. government's sequestration hurt the overall sector but, given that carrier spending hasn't yet rebounded to normal levels, analysts have had no choice but to trim Cisco's estimates in anticipation of weaker results.

Analysts are now looking for earnings per share of 49 cents on revenue of $12.18 billion, which would represent sales growth of 5%. But there are also some upside catalysts here as well. The recent 4G upgrades on U.S. wireless networks from the likes of AT&T (T) should fuel Cisco's hardware, which should help Cisco's two largest businesses, routing and switching.

That means that although estimates have been lowered due to weak macro events, it's possible that Cisco may offer an upside surprise. That should propel the stock higher. For this reason, I would be a buyer here, especially since the stock has shown a history of jumping by as much as 3% following the company's recent earnings reports, including for its fiscal second quarter when the stock reached a high of $21.46 in the days that followed the earnings announcement.

How Cisco guides, however, will also determine how investors react to the stock. Analysts on average expect fiscal fourth-quarter earnings of 51 cents per share on $12.49 billion in revenue, which would mean 6.7% revenue growth. Given Cisco's historical average of 5% sales growth, I think an estimate of $12.49 billion, which is above my target of $12.35 billion, is a bit aggressive - albeit a positive sign of confidence.

Moving Forward

As evident by these projections, analysts are becoming more bullish on Cisco, whose stock has jumped to its highest level in two years. The Street seems to be warning up to management's strategy to lead the company out of its long-time hardware mindset to more of a "software company." For instance, when Cisco reported second-quarter earnings in February, the stock jumped despite noticeable weaknesses in the company's core routing and switching businesses.

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