The Other Cisco: Investors Ignore the Good

Tickers in this article: CSCO FFIV HPQ JNPR

NEW YORK (TheStreet) -- Cisco , the world's largest network equipment maker reported fourth-quarter earnings on Wednesday and it would seem that the company did its best-convincing job yet of why it deserves to regain its status as one of the best-run technology companies on the market.

Leading into the call, I recommended buying the stock in anticipation of what would be its sixth consecutive earnings beat. As a reliable mail carrier, it delivered!

For the quarter, analysts were expecting net income of 45 cents per share on revenue of $11.62 billion, an increase from the 35 cents (or 17%) earned the previous year. For the period May to July, Cisco said it earned $1.9 billion, or 36 cents per share -- representing an increase of 56% from the same period of a year ago when it earned $1.2 billion, or 22 cents per share. Excluding costs and special items, earnings arrived at 47 cents or 2 cents higher than consensus estimates.

The company reported 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 U.S. as sales grew 7%. The company did not fare so well overseas and in particular Europe and the Middle East where it reported a 5% drop in revenue.

If you recall, this was the chief concern of management when it offered the less than favorable guidance in its Q3 report sending its stock tumbling by double-digit percentage points although it logged a beat in both the top and bottom lines. However, this time guidance was better and investors applauded by sending the stock higher by 5% to $18.21 in extended trading -- representing its highest level since May.

For the current quarter, the company expects earnings per share of 45 cents to 47 cents on revenue in the range of $11.5 billion to $11.9 billion - in line with analysts' EPS forecasts of 46 cents and revenue of $11.7 billion.

The company earned $8.04 billion, or $1.49 per share for the full fiscal year -- representing an increase of 24% from $6.49 billion, or $1.17 per share, in fiscal 2011, while revenue arrived at $46.1 billion, up 7% from $43.2 billion in the previous year.

This is yet another recent example of how irrational the market continues to be in its appraisal of earnings performances and growth expectations, as well as the different standards applied to companies that are (remarkably) within the same sector. It seems for Cisco, Wall Street expects it to be always great just to get treated fairly, while also discounting its strong balance sheet -- one that includes almost $50 billion in cash.

As it stands the stock is now trading at just over $17 per share after yet another excellent earnings report that demonstrated not only a tremendous level of execution but also sound decision-making in the face of shrinking corporate enterprise budgets.

The company's recent quarter was a proclamation to the market that Cisco intends on doing exactly what it takes to not only compete more effectively, but also return value back to shareholders by increasing its dividends.

Cisco said it will raise its dividend by 75%. The new quarterly dividend of 14 cents per share now represents an annual yield of 3.2% of the company's current stock price -- offering yet another reason to be bullish the company.

On the subject of the dividend, the company's CEO, John Chambers offered this: "We wouldn't have done the dividend commitment and the cash commitment if we didn't see stabilization in our business and had good confidence going forward."

He said this the company still sees growth even as rivals Hewlett-Packard , F5 and Juniper absorbed shrinking sales.

Yet in some cases, the rivals are trading at much higher valuations. Moreover, with a forward price-to-earnings ratio of 8, the stock is now trading with minimal expectations -- pretty remarkable for a tech company, particularly one that now has six consecutive quarters of earnings beats. Disappointingly, investors remain blinded by the fact that Cisco still owns over 60% share in the all-important switching business and over 50% in routing. There isn't another competitor that comes close.

From an investment standpoint, even on the most conservative assumptions, the stock represents tremendous value, by at least 40%. Without question, $25 to $28 should be where the stock is heading if one includes a modest 4% annual growth in free cash flow coupled with its existing $48 billion currently on the company's books.

Clearly the company is of the belief that there will be a pickup in the global economy and its stock price should soon appreciate commensurately.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Tickers in this article: CSCO FFIV HPQ JNPR