Cisco's Miss Isn't the End of the World

08/18/2010 1:00 pm EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of Ian Wyatt’s $100K Portfolio, says the tech titan is still putting up strong numbers, and its shares change hands at a very attractive price.

Cisco Systems (Nasdaq: CSCO) recently reported mixed results and shared an outlook that spooked investors and sent shares lower by 10%.

The good news was that Cisco reported [earnings of 43 cents a share,] a penny ahead of Wall Street analyst expectations. The earnings compared quite nicely to the year ago quarter, when the company earned [19 cents] per share.

The bad news was that revenues were a little below expectations. The company had given guidance for revenues in the range of $10.7 billion to $10.9 billion. Analysts accepted the higher number as their consensus estimate. For the quarter, Cisco's revenues of $10.8 billion fell $100 million shy of the estimate.

While that's a big dollar amount, for a company of this size, it's almost a rounding error—a miss of less than one percent. After all, Cisco did increase its revenues an impressive 27% from the year ago quarter.

But it wasn't just the revenue shortfall that concerned investors. The outlook from [chief executive officer] John Chambers raised concerns about the future growth prospects for the company and technology sector, and in turn the recovery of the global economy. For the next quarter (the first quarter of fiscal 2011), Cisco expects sales to grow by 18% to 21%.

Chambers went on to explain that Cisco customers are concerned about the prospects for the recovery, and are seeing signs of a slowdown. And that is trickling down to Cisco.

"When the customers get nervous, I get nervous,” [he said]. "So, what is coloring [lower guidance] is purely what we are hearing from customers and what people are seeing in the economies.

“Again, very few people [are] projecting doom and gloom or a double dip. They are just saying it's just very sluggish growth, and it's very mixed signals in terms of what they are seeing in their own business. Their own business feels good, but they are very cautious of the others, and they are hesitant, therefore, about hiring. They are hesitant about capital spending."

Cisco’s shares closed [above $22 Tuesday.]  Shares are currently trading at a reasonable 13.7x trailing earnings of $1.61 per share, or 12.8x fiscal 2011 earnings estimates [of $1.73]. With the stock well below the average P/E for the stock market as a whole, Cisco appears to be an attractive value during this period of weakness.

When all is said and done, Cisco had a solid quarter and is projecting good growth for the coming year. Everyone knows that the world economic recovery isn't firing on all cylinders, and that the turnaround will take time. I believe Cisco will weather any bumps in the road as well [as] or better than other technology companies, and shares should see up side from this level.

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