NEW YORK (TheStreet) -- Communication and network equipment manufacturers are facing serious challenges to their business models. The telecom companies that are their customers are spending less on equipment, and Internet giants are developing their own networks based on open-source software and off-the-rack hardware. 

That said, several of them are good buys, particularly the largest ones. Their superior access to capital and cash reserves give these hi-tech firms substantial advantages. Perhaps most notably: They often are able to buy smaller competitors to keep growth alive while protecting their turf. This advantage also helps guard against the greatest fear for these firms: a nimble competitor arises, perhaps even someone working out of a garage, with a more efficient product.

So what are the best large-cap communication and network equipment companies investors should buy? Here are the top three, according to TheStreet Ratings,TheStreet's proprietary ratings tool. 

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points,TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Check out which three large-cap tech companies made the list. And when you're done be sure to read about which telecom stocks to buy now. Year-to-date returns are based on April 23, 2015 closing prices. The highest-rated stock appears last -- read more to see which one is No. 1.

 

HRS ChartHRS data by YCharts
3. Harris Corporation (HRS)

Rating: Buy, A-
Market Cap: $8.5 billion
Year-to-date return: 14.2%

Harris Corporation, together with its subsidiaries, operates as an international communications and information technology company worldwide. The company operates through RF Communications, Integrated Network Solutions, and Government Communications Systems segments.

"We rate HARRIS CORP (HRS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. Among the primary strengths of the company is its solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • HARRIS CORP's earnings per share declined by 5.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, HARRIS CORP increased its bottom line by earning $5.00 versus $4.16 in the prior year. This year, the market expects an improvement in earnings ($5.02 versus $5.00).
  • Net operating cash flow has declined marginally to $173.00 million or 0.85% when compared to the same quarter last year. Despite a decrease in cash flow HARRIS CORP is still fairing well by exceeding its industry average cash flow growth rate of -19.73%.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed compared to the Communications Equipment industry average, but is greater than that of the S&P 500. The net income has decreased by 11.1% when compared to the same quarter one year ago, dropping from $141.40 million to $125.70 million.
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ERIC ChartERIC data by YCharts
2. Ericsson (ERIC - Get Report)

Rating: Buy, A-
Market Cap: $37.5 billion
Year-to-date return: -4.3%

Ericsson provides communications technology and services worldwide. The company's Networks segment delivers products and solutions for mobile access, Internet protocol (IP) and transmission networks, core networks, and cloud.

As can be seen from the chart, Ericsson's shares recently fell -- due to an earnings miss -- swinging it to a loss year-to-date from a gain. While this could bode poorly for Ericsson's stock price going forward, it could also mean it's a good time to scoop up shares of a quality company at a discount.. 

"We rate ERICSSON (ERIC) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • In its most recent trading session, ERIC has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Despite the stock's decline during the last year, it is still somewhat more expensive (in proportion to its earnings over the last year) than most other stocks in its industry. We feel, however, that other strengths this company displays offset this slight negative.
  • The revenue fell significantly faster than the industry average of 0.0%. Since the same quarter one year prior, revenues fell by 32.9%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • ERICSSON has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, ERICSSON reported lower earnings of $0.45 versus $0.58 in the prior year. This year, the market expects an improvement in earnings ($0.74 versus $0.45).
  • 41.74% is the gross profit margin for ERICSSON which we consider to be strong. Regardless of ERIC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ERIC's net profit margin of 6.61% is significantly lower than the industry average.
  • ERIC's debt-to-equity ratio is very low at 0.17 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, ERIC has a quick ratio of 1.66, which demonstrates the ability of the company to cover short-term liquidity needs.
  • You can view the full analysis from the report here: ERIC Ratings Report
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CSCO ChartCSCO data by YCharts
1. Cisco Systems, Inc. (CSCO - Get Report)

Rating: Buy, A
Market Cap: $146.4 billion
Year-to-date return: 3.1%

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide.

"We rate CISCO SYSTEMS INC (CSCO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, notable return on equity, attractive valuation levels and increase in net income. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CSCO's revenue growth has slightly outpaced the industry average of 0.0%. Since the same quarter one year prior, revenues slightly increased by 7.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Communications Equipment industry and the overall market, CISCO SYSTEMS INC's return on equity exceeds that of both the industry average and the S&P 500.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Communications Equipment industry. The net income increased by 67.5% when compared to the same quarter one year prior, rising from $1,426.00 million to $2,389.00 million.
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