Tags: Cisco | road | recovery | CSCO

Cisco Stock On the Road to Recovery

By Dan Weil   |   Wednesday, 11 Jan 2012 07:04 AM

Cisco (CSCO), the world’s largest maker of networking equipment, is traveling the road to recovery after stumbling for months. The company had a bloated payroll, bloated expenses, and a sclerotic decision-making process. It also drifted from its core expertise, as evidenced by its failed Flip video-camera business.

But Cisco is making progress on these issues. Switches and routers, which carry data across networks, generate almost two-thirds of Cisco's revenue. The company is returning its focus to these products. In July, Cisco announced that it’s dumping 6,500 workers. It also is cutting costs and streamlining management.

Demand for cloud computing is helping to boost Cisco’s data-center switching business. That’s a market the company dominates.

Cisco's has held more than 60 percent of the switch market for the past five years, according to Morningstar. Competition in that segment from HP (HPQ), Juniper (JNPR), and Brocade (BRCD) has had little impact. It’s tricky for customer to change providers, and Cisco devotes great energy to product development and customer support.

Routers are used by phone service and cable service providers to move data across long distances. In that market, Cisco and Juniper basically have a duopoly. Cisco is well set for years of dominance.

Mixed review

The company registered net income of $1.8 billion in the quarter ended Oct. 29, down 8 percent from $1.9 billion a year earlier. Revenue gained 5 percent to $11.3 billion.

Standard & Poor’s analyst James Moorman has a hold rating on Cisco shares. “While we see CSCO benefiting from a rapid rise in bandwidth usage, we expect product transition issues, public spending weakness, and pricing pressure to persist for the next several quarters,” he writes.

“Although the stock is trading well below peers on a P/E (price-earnings) and price-to-EBITDA basis, we think valuation multiples will remain depressed until CSCO proves it can maintain gross margins despite slowing revenue and a competitive environment.”

The company next reports earnings Feb. 8.

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