Cisco Gets Leaner and Meaner -- Finally

BOSTON ( TheStreet) -- Dow dog Cisco ( CSCO) is among the most hated U.S. stocks.

It's down 32% in the past year, but may have, finally, found bottom as management sheds costs and laggard units, and focuses on its lead-market-share businesses of switches and routers. Yesterday, it leaked that Cisco is planning 10,000 job cuts.

Although it's in poor taste to applaud the firing of workers, publicly traded businesses exist to maximize shareholder wealth, and unnecessary workers detract from that mandate. Cisco, which recently initiated a dividend and bought back shares, is desperately trying to appease the market. It's now resorted to cost cuts and margin expansion. It closed its Flip camera business in April and rumors are circulating that it plans to sell its Linksys home-router division and its set-top-box operations. A nimble Cisco is emerging.

According to insiders, 7,000 workers will be dismissed and 3,000 will receive early-retirement packages. Cost savings are forecast to total $1 billion for fiscal 2012, a hefty figure. CEO John Chambers is determined to right-size the company and recapture market share from the likes of Juniper Networks ( JNPR) and Alcatel-Lucent ( ALU). Juniper's stock has risen 20% in 12 months, but is down 15% in 2011. Alcatel's has doubled in the past year and appreciated 87% in 2011. Cisco's stock has rebounded 5.1% from its recent 52-week low.

But, Cisco's earnings report, due Aug. 10, will likely be lackluster. In past quarters, guidance reductions have hammered the shares. They corrected 4.8%, 14%, 16%, 10% and 5.3%, in reverse sequence, following the past five quarterly reports. In sum, Cisco has been a terrible stock to own around announcements. Last quarter, the company delivered 42 cents of adjusted earnings, flat year-over-year, but exceeding analysts' projections by 14%, and its stock still fell on the release. Cisco seems to understand the market's criticism and is now making strides to streamline operations and reward stockholders. Its shares are quite cheap.

Cisco currently trades at a forward earnings multiple of 9.3, a book value multiple of 1.9, a sales multiple of 2.0 and a cash flow multiple of 8.4, 56%, 41%, 47% and 63% discounts to communications equipment peer averages. Cisco ranks among the cheapest Dow components, based on a variety of peer valuation metrics. It also carries a net cash position (cash minus debt) of nearly $27 billion, boasting a quick ratio of 3.1, well above the highly liquid threshold of 1. Despite a pristine balance sheet, the normally acquisitive company has tapered its buyouts, having purchased three small-scale techs in 2011, thus far. Chambers was pushing for a juicy cash-repatriation holiday, which is rapidly decreasing in likelihood.

The holiday would allow Cisco to import its accumulated foreign profits home, without paying a second government tax. Given that Chambers is now laying off thousands of workers, the pitch has lost legitimacy as the selling point to the government was that repatriation would catalyze job creation. While investors continue to avoid Cisco, in large part due to a falling-knife predilection, its business, in the opinion of many, is fixable. It has top market share, by a wide margin, no less, in global switches and routers and its products are considered top notch. Thus, convincing stock investors of a turnaround story may not be all that tough.

In fact, calling Cisco a turnaround story is a bit far-fetched. Market participants seem to have overreacted to Cisco's woes over the past 12 months and that overreaction is eliciting a response from management. Provided that the economy maintains a steady, positive trajectory, Cisco shares may be due for a major optimism-induced rally in coming weeks.

-- Written by Jake Lynch in Boston.


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