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Give Cisco Systems, Inc. (CSCO) Stock a Second Chance Around Earnings

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For just a little less than three months, shares of Cisco Systems, Inc. (NASDAQ: CSCO ) traded in a narrow range of between $31 and $32 a share that's more akin to preferred shares than a tech stock. In the same timeframe, the Nasdaq Composite is up around 3.5%. Cisco's valuations might be compelling, but CSCO stock itself really isn't.

Check Your Ego at the Door and Buy Cisco Systems, Inc. (CSCO) Stock

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Still, boring isn't bad. And at a price-to-earnings ratio of 16, as well as a forward valuation of 13 and dividend of 3.6%, investors should really give the networking giant another look ahead of its Wednesday, Aug. 16, earnings report.

At face value, Cisco is a sleepy networking stock, but it is quietly building its business in potentially good markets. Network security still is mission-critical for customers, so as spending goes up, Cisco's customers are happy with breaches going down.

CSCO offers malware protection solutions through its Meraki MX line and directly integrating it with AMP (Advanced Malware Protection) technology. Built with OpenDNS, Cisco's offerings become a touch point anywhere a customer needs security on the back end. The addressable market is more than $70 billion, and has potential for growth.

Cisco is a top provider in the firewall market, too. Traditionally, networks need physical hardware firewalls and next-generation ones. As networks get more complex, Cisco will offer virtual firewalls to enforce security in the public cloud. So, Amazon.com, Inc. (NASDAQ: AMZN ) could have more security policies applied to it through a Cisco virtual firewall.

If the earnings report from FireEye, Inc. (NASDAQ: FEYE ) on Aug. 1 is any indication to growth, Cisco should also put out a strong fiscal-fourth quarter report Wednesday. FireEye reported revenue of $185.5 million, which beat consensus estimates. It also raised quarterly revenue estimates to as high as $189 million, and for the year, FEYE could see a top line between $734 million and $746 million.

The strong outlook for FireEye has positive implications for CSCO stock. Demand for AMP cloud solutions will likely grow, just as it has for FireEye. Cisco is confident AMP is unique in the market and is difficult for competitors to beat.

Fourth-Quarter Expectations

Cisco reported nearly flat revenue growth in its last (third) quarter. It delivered on revenue of $11.9 billion and non-GAAP earnings of 60 cents per share. Its acquisition of AppDynamics in that time should add positively to result either as early as this quarter. The solution gives its customers a view of everything: networking, data center, security, and applications.

CSCO also spent more on marketing and operating costs last quarter. The non-GAAP cost of sales and expenses totaled $150 million. Still, the investment in the business should pay off for the upcoming reporting period, possibly lifting sales for Security and Wireless in particular. Revenue from Security grew 9% last quarter, thanks to solid demand for unified threat management. Wireless grew 13% as Cisco ramped up its 11 AC Wave 2 portfolio.

Geographically, the emerging markets, BRICs, and Mexico were a drag on results. EMEA fell 6%. Emerging markets dropped by 12%, and BRICs plus Mexico fell 10%. At a macro level viewpoint, the less frequent talk of a wall between the U.S. and Mexico, along with a rebound in the Mexican peso, may result in better performance in the region.

Bottom Line on CSCO Stock

Cisco is not an interesting stock, but it is a solid company that offers modest growth potential and an attractive dividend. The upcoming quarterly report should affirm that view.

Value investors may have a hard time keeping their eyes open, but if they can deal with some yawning, they may want to take another look at neglected CSCO stock.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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