Cisco Systems (Nasdaq: CSCO) Stock: Earnings Don't Tell the Whole Story

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A slight earnings beat apparently wasn't good enough for Wall Street, which nudged Cisco (Nasdaq: CSCO) stock down more than 4% in after-hours trading.

Even an increase in the quarterly dividend by $0.02 a share, to $0.19, wasn't enough to deter the bears. Cisco's yield will rise to about 3.3%.

Sep 16 03:16 PM
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Price: 25.31 | Ch: 0.25 (1.0%)

The maker of networking gear announced results after the market closed Wednesday and said it earned $0.47 cents a share in its fiscal second quarter, just barely beating expectations for $0.46 cents a share.

Revenue was $11.2 billion, also slightly higher than the $11.04 billion that analysts had forecast.

Investors were disappointed despite the beat because both numbers represent declines from the year-ago numbers.

Still, it would be a mistake to underestimate the veteran tech giant. Cisco is very much a company in transition right now, with an eye toward the future.

"We delivered the results we expected this quarter," chairman and Chief Executive Officer John Chambers said. "I'm pleased with the progress we've made managing through the technology transitions of cloud, mobile, security and video. Our financials are strong and our strategy is solid. The major market transitions are networking centric and as the Internet of Everything becomes more important to business, cities and countries, Cisco is uniquely positioned to help our customers solve their biggest business problems."

Granted, Cisco faces some serious challenges right now.

In addition to weakness in emerging markets, which the company acknowledged last year, rivals Juniper Networks Inc. (NYSE: JNPR) and F5 Networks, Inc. (Nasdaq: FFIV) have been nibbling at Cisco's market share.

What's more, Cisco faces an even bigger threat on the horizon: software-defined networks (SDNs) that offer a cheaper alternative to the hardware-based networking equipment that is Cisco's bread-and-butter.

Finally, Cisco is still trying to fight its way out of "laggard" status. The world's most valuable company by market capitalization in the late 1990s, Cisco stock went flat after the dot-com bubble burst and has been searching in vain for growth ever since.

And yet, with all those headwinds, Cisco stock hasn't reacted as one would expect...

Why Cisco (Nasdaq: CSCO) Stock Hasn't Collapsed - But Will Go Higher

Over the past month, Cisco stock is up 2.58%, closing at $22.85 Wednesday. And over the past year, Cisco stock is up 8.7% (although down somewhat from its 52-week high of $26.49).

If Cisco's business is in such trouble, why hasn't the stock collapsed?

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Chambers touched upon the answer in his comments. It's true that Cisco's traditional business is under pressure. But company management realizes what's happening and is moving toward taking advantage of the new opportunities created by the changes in the tech landscape.

Over the past year, Cisco has made several key acquisitions to allow it to move into such areas as the cloud (Meraki), SDNs (Cariden), and cybersecurity (Sourcefire), which not only offer growth but higher margins than its traditional business of networking hardware.

The combination of these acquisitions and the slow erosion of Cisco's old business have taken a toll on the company's profits, as we can see in today's earnings, and may see for the next couple of quarters.

Nevertheless, it's a promising strategy, even if it takes a year or two to pay off. At least Cisco management realized that sitting still was a death sentence and has taken aggressive action.

With Cisco stock under pressure in the short term, investors should consider this a buying opportunity.

With a P/E of just 12.4, and a forward P/E of just under 11, Cisco stock is already in bargain territory.

Once the company's strategy kicks in, the higher margins and better cash flow will start to be reflected in the earnings. And that will start nudging Cisco stock higher.

"The financial model remains strong, and the new products could add upside," Brian Marshall at ISI Group recently told Barron's. "At this price, the stock has more upside potential than downside."

Can #Cisco make a comeback, or is it "dead money"? Voice your opinion on Twitter @moneymorning or Facebook.

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