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Cisco: The anti-Microsoft
Some think the company is maturing but investors are underestimating its growth potential.
August 8, 2005: 9:37 AM EDT
By Paul R. La Monica, CNN/Money senior writer

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Investors should pay close attention to what Cisco CEO John Chambers says about how newer technologies like home networking and security are doing.
Investors should pay close attention to what Cisco CEO John Chambers says about how newer technologies like home networking and security are doing.
Lef behind: Techs have rallied during the past year but Cisco, like fellow megacap Microsoft, has failed to join the party.
Lef behind: Techs have rallied during the past year but Cisco, like fellow megacap Microsoft, has failed to join the party.
INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER upgrades & downgrades earnings & warnings public offerings INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER
Cisco on sale?
Although Cisco's growth rate is lower than rivals, the stock may trade at too steep a discount.
Company P/E* Est. '06 EPS Gr. Est. LT EPS Gr. 
Cisco Systems 18.6 15% 15% 
Foundry Networks 30.3 29% 20% 
Juniper Networks 27.8 24% 20% 
F5 Networks 23.3 27% 30% 
S&P 500 16.1 6% 6% 
 * based on fiscal 2006 estimates. All data as of 8/3/05
 Source:  Thomson/Baseline

NEW YORK (CNN/Money) – Cisco Systems is looking a lot more like Microsoft these days ... and that's not a compliment.

Shares of Cisco (Research), the leading maker of networking gear that connects computers to the Internet, have traded in a narrow range for the past year ... just like Microsoft (Research).

The company dominates its market but critics maintain that Cisco's core business is maturing...just like Microsoft.

Cisco has a ton of cash ($16.1 billion) and investors are wondering what the company should do with it ... just like Microsoft. (To that end, a little-known British newspaper reported Sunday that Cisco might be interested in buying Finnish cell phone maker Nokia (Research) in order to acquire its wireless networking technology. Most analysts shot down this rumor though).

And some analysts are even starting to worry that Cisco's technology is vulnerable to security breaches ... well, you get the idea.

But there's one big difference between the two companies: Cisco actually is a growth stock and should be valued like one.

Sales and earnings still sizzling

Cisco will report its fiscal fourth-quarter results on Tuesday. Sales are forecast at $6.56 billion, for 11 percent growth. Earnings are forecast at 25 cents a share, for 17 percent growth. Analysts expect pretty much more of the same in the current quarter and for all of fiscal 2006.

Now growth in the mid-teens may not seem like much compared to Cisco's numbers in the go-go 1990s. And Cisco does have smaller rivals like Juniper Networks (Research), F5 Networks (Research) and Foundry Networks (Research) that are growing faster.

But William Becklean, an analyst with Oppenheimer & Co., said that strong results from other networking equipment firms lately is a sign that corporations are starting to increase their spending on switches and routers again. And that should lead to higher growth rates for Cisco as well.

Foundry reported better than expected second-quarter revenue last month. Another Cisco competitor, Extreme Networks (Research), posted fiscal fourth-quarter sales Wednesday that beat consensus estimates.

"There has been some good evidence that we are seeing a pickup. The outlooks have been decent and that bodes well for Cisco," Becklean said.

Shopping spree leading to new opportunities

Increased demand for routers and switches would obviously be good news. But Cisco is also putting a lot of its cash to work to expand into more lucrative areas.

It always has been a voracious acquirer of smaller tech firms (i.e. not giant public companies like Nokia) and it has even stepped up the pace. Since May, Cisco has announced the purchase of five private companies.

Cisco has bought several security firms, including MI Secure, FineGround Networks and NetSift, this year. These deals come at a crucial time for Cisco. Security is not only a rapidly growing market but a vital area for the company to invest in given increased talk about how Cisco's routers could be subject to hacker attacks.

The recent acquisition of a Danish company called KiSS Technology is also interesting since KiSS makes consumer entertainment devices such as DVD players and digital video recorders (DVRs) that can connect to a home network and access content from the Web.

KiSS will become a part of Cisco's consumer-oriented home-networking division, Linksys. Since Cisco acquired Linksys in 2003, it and other so-called "advanced technologies" businesses have become an increasingly important part of the company's growth strategy.

In addition to security and home networking, Cisco has targeted four other key markets that it wants to become a major player in: Internet telephone equipment, optical networking, storage and wireless.

So when Cisco reports its latest results, it will be interesting to hear what CEO John Chambers says about the progress in these businesses.

During the first nine months of this fiscal year, revenues from these six businesses increased by 34 percent from the same period a year ago and accounted for 18 percent of Cisco's total sales, up from 15 percent a year earlier.

Bargain price for above-average growth

Assuming that these newer businesses continue to grow at a healthy clip and the switches and router divisions maintain a stable rate of growth, it's tough to imagine how Cisco's stock can continue to remain in the doldrums for much longer.

Shares now trade for about 19 times fiscal 2006 earnings estimates, only a slight premium to the overall market even though Cisco's projected long-term growth rate is more than twice that of the S&P 500. What's more, Cisco trades at a steep discount to most of its smaller competitors.

Jim Huguet, president of Great Companies, a Clearwater, Fla.-based investment firm that owns Cisco in the TA IDEX Great Companies America fund and TA IDEX Great Companies Technology fund, said he thinks the stock is still a solid growth story and has about 20 percent upside from current levels.

"Cisco is well-run and continues to grow their business. We're comfortable with them as a long-term holding," Huguet said. "I don't think Cisco has reached the maturity point yet that Microsoft has."

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Oppenheimer's Becklean does not own shares of Cisco and his firm has no banking ties to the company.

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