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Aruba Networks Seems Cheap But Is There Value?

NEW YORK ( TheStreet) -- Warren Buffett famously said "Price is what you pay. Value is what you get." Investors who struggle with making this distinction between price and value might find it difficult to avoid a stock like Aruba Networks (ARUN) that has recently fallen by as much as 44% over the past several weeks after reporting a brutal fiscal third-quarter report.

Although the stock has rebounded 20% from its $12.38 low, fears about the overall health of the wireless local-area-network (WLAN) market continue to add pressure on Aruba's near-term prospects, which caused the panic selling. Making matters worse, network giant Cisco (CSCO - Get Report), which owns more than half of the WLAN market has shown no such weaknesses.

What's more, given Cisco's recent comments regarding WLANs and what seems like CEO John Chambers' renewed commitment to growing that part of the business, current Aruba investors should consider that the worst might not be over. Even more disappointing, was that Aruba blamed Cisco's aggressiveness, which included pricing discounts, for Aruba's disappointing third-quarter results. But is Cisco really to blame?

As much as I've always liked Aruba, one of my major concerns has been the competition. I've never felt that Aruba's management addressed the company's leverage well enough. And it seems that it's precisely this deficiency that has now come home to roost.

Still, Aruba's earnings results were not that all surprising -- as bad as they were. Management had already issued a warning to investors a couple of weeks prior that the results were going to be below estimates. Plus, given the fact that Aruba relies so heavily on government contracts, the issues regarding the government sequestration didn't help matters.

To that end, Cisco, which also relies on government spending as well as large corporate customers, saw an opportunity to close some deals (with or without discounts). Unfortunately, Cisco's leverage was used to squeeze out Aruba, which reported an 8% drop in earnings-per-share, when excluding items.

Relative to sell-side estimates, that was not a complete disaster. The company missed EPS estimates by just one penny. This is while postingg 12% revenue growth that was in-line with expectations. But as is often the case, it's not so much about what is reported, the stock reacted to what Aruba is now expected to report.
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