STOCK WATCH


Cisco Systems: Routing Better Growth

The leading maker of routers and switches pleased Wall Street with a brighter outlook.



Shares of Cisco Systems have languished over the past couple of years, as revenue growth at the networking giant slowed. But the company's latest quarterly earnings report could change investors' perceptions of company's prospects -- and its stock.

The stock (symbol CSCO), which is down more than 30% since January 2004 -- and 75% from its all-time high, set in 2000 -- surged 7% on Wednesday. The advance came after the release of better-than-expected earnings for the second quarter of Cisco's fiscal year.

Perhaps more important than the profit surprise, however, was word of surprisingly strong orders for Cisco's networking gear. "Order growth was the best the company had seen on over a year," says Oppenheimer analyst William Becklean. Increasing orders bode well for revenue momentum in the coming quarters.

Cisco had previously forecast that revenues would improve in the second half of its current fiscal year, which ends in July. But investors were skeptical, says SG Cowen & Co. analyst Christin Armacost. Now, she says, strong orders have set the stage for better growth, and the stock should climb higher over the next year, in her view.

Advertisement

Becklean also found the latest report encouraging and upgraded the stock from neutral to buy on Wednesday. More than likely, he says, he'll be raising his earnings estimates for Cisco in the coming months. "We believe the stock has made a bottom," he says.

Cisco dominates the market for routers, switches and other data networking equipment, and many analysts say that, given its increasingly broad range of products, including voice over Internet protocol (VoIP) and other advanced technologies, it's likely to continue to gain market share. It's also on the verge of completing its purchase of cable set-top maker Scientific-Atlanta. The deal is Cisco's largest acquisition ever, and Armacost says it should help make the company's offerings more appealing to service providers that are developing video-capable next-generation networks.

The stock, at $19, sells for 17 times the $1.11 per share that analysts estimate the company will earn in the 12 months ending January 2007.

--Lisa Dixon




You can get valuable updates like Stock Watch from Kiplinger sent directly to your e-mail. Simply enter your e-mail address and click "sign up."

More Sponsored Links


Advertisement

Market Update

Advertisement

Featured Videos From Kiplinger