NEW YORK (CNN/Money) – Cisco Systems is at a crossroads.
On the one hand, the leading maker of networking equipment still has many of the attributes of a growth stock. When Cisco reports its fiscal second quarter results Tuesday, for example, the numbers should be extremely strong. Analysts expect earnings of 22 cents a share, a 22 percent increase from a year ago, and sales of $6.13 billion, up 13 percent.
But Cisco (Research) is also starting to look more and more like a mature company. Growth in its core businesses of selling routers and switches is slowing and competition is increasing. There is no longer a palpable sense of excitement surrounding Cisco. The stock is perilously close to its 52-week low.
As a result, analysts said that it would not be a surprise if Cisco once again boosted its share buyback program, as it did last November.
But investors mostly be hoping for a solid upside surprise. Cisco has a history of beating estimates by a penny or two per share. When the company didn't come through last quarter (it merely met estimates), the stock dropped 6.6 percent in a day, and it has yet to recover. The stock now trades for just 21 times fiscal 2005 earnings estimates, a far cry from the type of valuation the company typically fetched.
At the same time, smaller rivals like Juniper Networks (Research) and Extreme Networks (Research) trade at more than 30 times this year's earnings projections while F5 Networks (Research) sports a P/E multiple north of 40.
Street wants Cisco to beat and raise
In order for Cisco's stock to start approaching these valuation levels again, Cisco likely needs to raise its fiscal third quarter sales targets as well. Analysts expect Cisco to generate $6.23 billion in sales for its third quarter, which ends in April.
But even though this revenue target is only about a 1.5 percent sequential increase from the fiscal second quarter, analysts say it will be difficult for Cisco to boost its guidance significantly.
Timm Bechter, an analyst with Legg Mason, said that Cisco CEO John Chambers would probably reiterate the guarded tone that he has maintained for the past few quarters.
Since Cisco's core client base consists mainly of large corporations, so-called enterprise firms, Chambers' comments about its customers' spending plans are widely scrutinized.
And there has been little to suggest that the economy is booming at such a rate that would make large corporations more eager to ratchet up their spending. The January employment report, for example, was a disappointment.
"Chambers will probably remain fairly cautious. The jobs report wasn't great and there has been a little weakness in U.S. enterprise spending," said Bechter.
The recent round of telecom mergers and increased speculation about more deals could also make Chambers reluctant to express too much optimism about the next quarter, said Kenneth Muth, an analyst with Robert W. Baird.
Muth estimates that about 15 to 20 percent of Cisco's sales come from telecom service providers, such as the Baby Bells and long-distance companies. Because of the consolidation in telecom, these companies might be unwilling in the near future to spend as much on the types of high-end routers that Cisco makes.
"Telecom consolidation may make it difficult for Cisco's sales visibility and this could take a bit of a thunder away from the guidance. I think growth in the third-quarter will be muted," said Muth.
All that said, there's no denying that Cisco's stock is trading at an attractive valuation. Bechter thinks it's a great buy for the long-term, primarily because of emerging growth opportunities such as equipment for video conferencing and Internet telephony.
But Muth said unless Cisco surprises the Street with much stronger sales growth, it's going to be hard to justify a surge in the near-term. He said the stock isn't trading at a low enough valuation yet to attract a more traditionally oriented value investor. So Cisco's stock might just muddle along until there are more signs of a broader economic pick-up.
"Cisco is a fair value but that doesn't mean the stock works. It just prevents it from going a lot lower," Muth said.
Legg Mason's Bechter owns shares of Cisco and Juniper but his firm has not done banking for either company or others mentioned in this piece. Baird's Muth does not own any of the stocks mentioned in this story and his firm has no investment banking relationships with any of them.