Can Cisco Overcome Wall Street's Doubts?

NEW YORK ( TheStreet) -- It's always interesting to see how the Street is ready to reward unproven companies with outrageous valuation multiples in the hope they are able to one day fulfill their promise. This is regardless of how ridiculous these expectations may be.

On the other hand, these same investors insist on severely discounting or completely ignoring companies for no reason other than the fact that they are no longer perceived "sexy," regardless of how solid their balance sheets may be.

Tech giant Cisco ( CSCO) falls into this category.

While the company may no longer be the untouchable king of networking, its equipment still powers more than half of the Internet. What's more, though Wall Street continues to think very little of Cisco's growth potential, the company is far from being the "walking dead" stock as presumed by its current P/E of 8.

For that matter, the company has put together six consecutive earnings beats. But as usual, investors remain unimpressed.

Better Growth Than Expected

In its most recent quarter, Cisco reported fiscal fourth-quarter revenue of $11.7 billion, beating analysts' estimates while topping last year's mark of $11.2 billion. The better-than-expected results were largely attributable to growth in North America -- in particular the U.S. where sales grew 7%.

Cisco said it earned $1.9 billion, or 36 cents per share, representing an increase of 56% from the same period of a year ago when it earned $1.2 billion, or 22 cents per share.

Excluding costs and special items, earnings arrived at 47 cents, or 2 cents higher than consensus estimates. For the quarter, analysts were expecting net income of 45 cents per share on revenue of $11.62 billion, an increase from the 35 cents (or 17%) earned the previous year.

What stood out in this report was EPS growth, which registered at almost 60% year over year.

This has been an area where investors seem to doubt Cisco's ability to generate such momentum, particularly since it guided for a weaker quarter resulting in its stock tumbling by double-digits percentage points, even though it logged a beat in both the top and bottom lines for the third quarter.

But there are better times ahead for fiscal first-quarter 2013 projections. Unlike last quarter, this time guidance was more favorable and investors applauded by sending the stock higher by 5%.

Cisco expects earnings per share of 45 cents to 47 cents on revenue of $11.5 billion to $11.9 billion, in line with analysts' EPS forecasts of 46 cents on $11.7 billion in revenue. The company earned $8.04 billion, or $1.49 per share, for the full fiscal year, an increase from $6.49 billion, or $1.17 per share, in fiscal 2011. This is while revenue arrived at $46.1 billion, up from $43.2 billion in the previous year.

What About Tomorrow?

While no one is expecting Cisco to grow as it did in the mid to late 1990s, there is considerable doubt on the Street that it can grow at all. Providing investors a reason to believe is the company's biggest challenge -- that, and fighting off the competition from F5 ( FFIV), Juniper ( JNPR) and Hewlett-Packard ( HPQ), all gunning for market-share dominance.

I think Cisco's management deserves a lot of credit for ignoring the noise and instead focusing on sound execution. The company has admitted some mistakes, many of which has caused Juniper and F5 and, to some extent, Riverbed ( RVBD) to come out of nowhere and establish a presence in that all-important enterprise market.

Nonetheless, despite recent embarrassments about some failed acquisitions, Cisco still owns 60% in its core routing and switching business. This is while HP and F5 recently reported slower than expected market share growth.

It seems management has gotten more realistic about Cisco's operating structure and, better yet, its prospects for growth and returning value to shareholders.

Bottom Line

When assessing Cisco's investment worthiness, one of the first things that I notice is its strong balance sheet, one that carries almost $50 billion in cash. This gives it more flexibility over the competition.

With the level of cash on Cisco's books, even on the most conservative assumptions, the stock should be trading at $25. This assumes a modest 4% annual growth in free cash flow.

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

At the time of publication, the author held no position in any of the stocks mentioned.
Richard Saintvilus is a private investor with an information technology and engineering background and 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.