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Can Cisco Overcome Wall Street's Doubts?


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.

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Tech giant Cisco (NASDAQ: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 US where sales grew 7%.

Cisco said it earned $1.9 billion, or $0.36 per share, representing an increase of 56% from the same period of a year ago when it earned $1.2 billion, or $0.22 per share.

Excluding costs and special items, earnings arrived at $0.47, or $0.02 higher than consensus estimates. For the quarter, analysts were expecting net income of $0.45 per share on revenue of $11.62 billion, an increase from the $0.35 (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 $0.45 to $0.47 on revenue of $11.5 billion to $11.9 billion, in line with analysts' EPS forecasts of $0.46 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.

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