Cisco Gets Its Groove Back

by Tom Taulli | May 16, 2013 1:47 pm

The networking space has been tough lately. For the year so far, Juniper Networks’ (JNPR[1]) shares are off by 9%; the loss for Riverbed Technology (RVBD[2]) has been 18%. All in all, managements have blamed the uneven macroeconomic environment.

But the vibe is different for Cisco (CSCO[3]). Just today shares are up 13% to $24.06 on news of its fiscal Q3 results. The stock is now at a 52-week high.

In the quarter, profits came to $2.5 billion, or 46 per share, up from $2.17 billion, or 40 cents a share in the same period a year ago. Adjusted earnings (excluding one-time events) came in at 51 cents, beating the Street consensus of 49 cents. Revenue was also solid, up 5% to $12.2 billion; analysts were looking for $12.18 billion. And the outlook for fiscal Q4 is decidedly upbeat.

For the most part, Cisco has been getting results from its restructuring. For example, the company has dumped a variety of non-core assets, such as Linksys. The company has also had a series of layoffs.

But Cisco is not just about cost-cutting. It’s also focused on growth markets, such as the cloud, mobile and virtualization. These are all driving the demand for key infrastructure products like routers, switches and advanced networking software — Cisco’s bread-and-butter.

While it’s true there is lots of competition — say from Juniper, Huawei and a spate of start-ups — the company has tremendous global scale and its products are already integrated into the operations of many companies.  Thus, when it comes to upgrade networks, it’s a good bet that customers will renew orders with Cisco.

What’s more, the macro situation may also be showing signs of improvement, according to Cisco’s earnings call. CEO John Chambers noted that Europe may have stabilized and that the public-sector business in the U.S. is getting back on track.

And even with today’s run-up in the stock, the valuation is still attractive. The forward price-to-earnings ratio is a reasonable 11 times. More important, the gross margins have remained fairly steady, which means that the company should continue to generate nice profits. Oh, and the dividend is a healthy 3.2%.

So in light of the powerful secular trends in the tech world and Cisco’s strong global footprint, the stock’s gains may be far from over.

Tom Taulli runs the InvestorPlace blog IPO Playbook[4]. He is also the author of High-Profit IPO Strategies[5]All About Commodities[6] and All About Short Selling[7]. Follow him on Twitter at @ttaulli[8]. As of this writing, he did not hold a position in any of the aforementioned securities.

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