BOSTON (TheStreet) -- Networking-gear giant Cisco (CSCO - Get Report) has dropped 7.6% in a month as the Dow rallied 5.6%. Poor guidance following last quarter's results led to a sell-off.

With earnings season under way as of yesterday, it's time to review Cisco as its industry leads the pack in profit growth. Research firm Morningstar awards Cisco a superlative five-star rating, auguring 44% upside. Cisco reports earnings a month from now.

Cisco's quarterly adjusted profit increased 17% year-over-year to 42 cents, exceeding analysts' consensus estimate by 5.8%. The San Jose, Calif.-based company also beat on the top-line, yet its stock tumbled 16% around the earnings announcement due to lower-than-anticipated forward guidance from management. Cisco's quarterly gross margin narrowed from 69% to 67%, and its operating margin contracted from 24% to 22%. Value-focused Morningstar argues that, given Cisco's market share and competitive advantages, its stock sells at a discount to fair value.

Cisco holds 70% market share in Ethernet switches while the next-biggest competitor, Hewlett-Packard ( HPQ), has just 10%. Cisco also boasts lead market share in the router category, but Juniper Networks ( JNPR - Get Report) is a competitive threat and China-based Huawei is generating momentum in critical emerging markets, according to Morningstar.

Still, overseas expansion will generate significant profits in the next decade as the global economy rebalances. Though bullish, Morningstar believes management's 12% to 17% long-term growth target is "overly aggressive for such a mature firm."

Morningstar also says a recent move into data-center blade servers is a strategic misstep, given the low profit margins offered by such products and the possibility of irritating longstanding partners with a foothold in the market. There is already evidence of such backlash, according to Morningstar. Also, analysts are concerned with overly acquisitive behavior. Cisco has nearly $24 billion of net liquidity (cash minus debt). Given the strong performance of equity markets, it may be ill-advised to pay premiums to grow inorganically.

However, these caveats aside, Cisco remains a notably undervalued stock and Morningstar's $30 target suggests 44% of upside to fair value. Shares sell for a trailing earnings multiple of 15, a forward earnings multiple of 11, a book value multiple of 2.6, a sales multiple of 2.8 and a cash flow multiple of 11, 50%, 43%, 23%, 27% and 40% discounts to communications equipment industry averages. Cisco's trailing earnings multiple reflects a 24% discount to the five-year average. In addition to Morningstar, 70% of Wall Street analysts rate Cisco "buy."

Cisco will report fiscal second-quarter results Feb. 9. Researchers forecast sales over $10 billion, up 4.2% year-over-year, and earnings of 35 cents, up 6%. The board will commence a dividend in 2011, targeting a yield between 1% and 2%. Although Morningstar considers this payout meager, Cisco is actively reducing its float, amplifying the value of remaining shares. It added an additional $10 billion to its stock repurchase program in November. In the latest quarter, shares outstanding decreased 3%, boosting earnings per share.

Credit Suisse has the highest 12-month target on the Street, at $27, implying a 30% return, excluding dividends. In response to the sell-off, Credit Suisse accurately predicted that Cisco would be "dead money over the next 90 days with risk of further decline." Still, it retained its "outperform" rating on the stock. The order book missed estimates by a whopping $500 million, in large part due to a deterioration in public-sector spending in European countries and even within the U.S. at the state and local level. Analysts differ on their view of this potential headwind.

While some deemed the order shortfall a predictor of declining market share, others, including Credit Suisse, consider it a secular headwind. The bank's research indicates that there is no evidence of share loss, though that risk remains. And, the recent margin declines are due to lower volume and product shift rather than pricing pressure. Cisco's set-top-box business is under pressure from lower-cost competitors and "weak housing and consumer spending trends." North America orders plummeted 35% in that segment.

Analysts are mixed on whether the set-top-box business is in a transitory or secular decline. Cisco management points to 20% year-over-year segment growth in the three preceding quarters to demonstrate that the dip is temporary. Credit Suisse's tracking of cable-operator capital expenditure substantiates this defense. But the bank thinks this dip may last longer than expected. High-definition and digital-video-recorder boxes are in the late stages of the adoption cycle, whereas IP boxes are in the early stage.

Cisco will likely react to other technology earnings reports in the weeks ahead. It's a stock to follow. Shares may have upside if fiscal second-quarter results exceed expectations.

-- Written by Jake Lynch in Boston.


Become a fan of TheStreet on Facebook.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.