Left For Dead, Cisco Surprises Investors

On a day when the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is down 1.2% in late trading, there aren't a lot of bright spots for investors. To reinforce the point, the National Association of Home Builders/Wells Fargo Housing Market Index fell to 45 in May, down one point from April and the lowest level in a year, suggesting degrading homebuilder confidence.

But Cisco Systems (NASDAQ: CSCO  ) , long a laggard of the Dow, was up nearly 7% after easily topping Wall Street's earnings expectations.

Cisco is back from the dead
Expectations weren't exactly high for Cisco -- third-quarter revenue was down 5% year over year to $11.55 billion, but that still topped the consensus estimate of $11.36 billion. Net income dropped 3% to $2.6 billion, or $0.51 per share, $0.03 ahead of Wall Street's projection.  

It's really guidance that got investors pondering a comeback for the networking specialist. Management expects revenue to drop 1% to 3% in the current quarter, with earnings of $0.51 to $0.53 per share. Those beat Wall Street's expectations on both counts.

Cisco has seen revenue slow on lower sales of switches and other products, but it's starting to transition toward growth. Book to bill was "comfortably above 1," meaning revenue should grow in the future. That transition may also happen faster than analysts predicted with next quarter's decline smaller than expected.

What I think go underappreciated is the company's $50.5 billion cash hoard and the $3.2 billion from operations generated just last quarter. That gives investors a big safety net and also more than covers a 3.3% dividend yield.

If Cisco can just return to flat results it will be a steal for investors. The cash hoard is 40% of the company's $125 billion market cap, and despite some slowing in its main markets it can still command an incredible 63% gross margin, the envy of any company.

If you're looking for a value stock with upside potential, Cisco is a good one. Today shows that the market may be realizing that potential.

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