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Cisco's Still a Strong Buy Ahead of Earnings

Accordingly, Cisco has spent a good portion of its cash on recent acquisitions for the likes of Meraki, Cariden and BroadHop. So, as the hardware businesses continue to erode, Wall Street is applauding the company's growth and investments in software-defined-networking, or SDN.

Cisco's new outlook has also caught the attention of Raymond James analyst Simon Leopold, who recently said that shares were undervalued by 30%, while applying a $25 price target. In a research note to investors, Leopold said:

"We expect Cisco to outline its strategic vision to become a broader IT supplier with a greater software bias, which aids margin. We expect Cisco maintains its 5-7% long term growth target while offering cautious commentary on the near term."


Leopold's mention of margins suggests increased profitability while Cisco tries to build its SDN business. Besides, even though the hardware revenue and margins haven't been overly impressive, Cisco's hardware still powers more than half of the Internet - meaning, Cisco's transition presents a win-win situation for investors.

As the company continues to invest in its future, the good news is that Cisco is still growing in other areas such as data center, whose revenue rose 65% year over year in the second quarter. That is also a sign that Cisco is still a dominant force in servers where it is outperforming Dell (DELL) and Hewlett-Packard (HPQ).

What's more, the company's cash position will continue to present the company with options not available to rivals like Juniper (JNPR) and F5 Networks (FFIV). In that regard, when applying modest 3 to 4% free-cash flow growth, the stock still supports a fair market value of $30. That is despite having already gained 7% on the year. Cisco remains a strong buy.

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

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He 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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