Hold Your Breath for Cisco's Earnings

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cisco (NASDAQ: CSCO) has been ticking all the right boxes recently, and I'm convinced the company has a bright future ahead of it.

In its third quarter, Cisco beat earnings per share expectations of $0.49 with actual earnings per share reaching $0.51. Overall sales grew 5% as well as demonstrating impressive year on year growth for several business segments including data center and service provider video, rising 30% and 77%, respectively. However, core segments like switching slipped at -2% and routing stagnated at 0%. 

More good news ahead

I'm expecting more good news from Cisco pertaining to its fourth quarter results. Analysts are bullish on Cisco as well, with Deustche Bank raising its target share price for Cisco from $26 to $28. I am inclined to agree with the target, and here's why:

Cisco has made some excellent investments in recent months - investments that will ensure it continues to dominate in its core business segments. Two recent acquisitions of note are JouleX, a start-up specializing in energy management software, and Sourcefire, a provider of cyber-security solutions.

These investments will breathe new life into the aforementioned ailing segments - switching and routing. In doing so, Cisco will have a strong advantage over networking competitors such as Juniper Networks (NYSE: JNPR) and Alcatel-Lucent (NYSE: ALU) if they are integrated properly.  In addition, acquisitions of businesses like JouleX will support the expansion of Cisco's data center solutions, allowing operators to monitor energy usage - an issue which becomes critical as companies begin to scale their cloud networks.

How is the competition positioned?

Juniper is the better positioned company of the two, with the recent expansion of its "Partner Advantage Program" set to help partners become an exhaustive end-to-end solution for customers. The additions to the program favors those who are heavily invested in Juniper's solutions offerings. It does, however, give advantages to partners no matter what rung of the Juniper portfolio they sit on.

In addition, Juniper will be giving Cisco a run for its money in its highest growth area, data centers, with its new seamlessly integrated enterprise automation software. How this pans out for Juniper will be up to Cisco, which can either respond to the threat quickly or continue to focus on implementing recent acquisitions into the Cisco product stream. I don't expect Cisco to leap on this just yet, as the business can compete in parallel by integrating its energy solutions for data centers with existing solutions. Juniper does not have an adequate response to Cisco's energy solutions as of yet.

From a technical standpoint, Juniper isn't doing too badly. Much like Cisco, it beat analyst expectations for last quarter. Nomura stated that, “Juniper beat revenues by 6% and EPS by 19% driven by strength in service provider and enterprise." Nomura analyst Stuart Jeffrey raised the target share price from $18 to $21. The share price is now approximately $22, indicating positive sentiment for Juniper going forward.

Alcatel-Lucent

Alcatel-Lucent has had more of a struggle in recent times. In 2012, its gross margin was 30%-37% depending on the month, while Cisco boasted between 60% and 70%. In addition, a slew of management mishaps and shakeups has left Alcatel-Lucent focused on rebuilding its reputation with Wall Street. Back in September 2012, it went as far as to halve the size of its executive committee in an effort to consolidate management and turn around the sinking ship.

More recently, the 'Shift Plan' orchestrated by CEO Michel Combes is more evidence that Alcatel-Lucent is still struggling to come up with a profitable business plan, promising to cut costs and consolidate the company's efforts into a few, crucial business segments.

In its defense, the company reported a 2% rise in revenue along with strong revenue growth in its routing and wireless segments (20% and 5%, respectively) in comparison to last quarter. Unfortunately, gross margin is still lagging behind and at present comparison Alcatel-Lucent's numbers hold little weight against the success of Cisco and Juniper.

I would encourage readers to do some further research on Alcatel-Lucent, as it does have the potential to become a turnaround story. In my opinion, however, it is still struggling to figure out its corporate identity. As a result, I would stay away until it is clear there has been positive change. I can't see Alcatel-Lucent becoming a real threat to Cisco while it is still a threat to itself.

The bottom line

In conclusion, I believe Cisco is going to please investors come August 14, when the fourth quarter teleconference takes place. More importantly, Cisco is headed towards a bright future with the integration of JouleX and Sourcefire into its service offerings and more to come, no doubt. At the same time, Juniper shouldn't be discounted given it is holding its own against the networking giant and is attempting to strengthen its own position. Alcatel-Lucent, on the other hand, is in for a slow revival or another slide.

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Dan Sayers has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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