Cisco Systems, Inc. (NASDAQ: CSCO) is due with earnings on Wednesday.  The stock has been punished severely with the broader market sell-off, but today the stock is not even participating in the rally.  In fact the stock hit a new 52-week low of $13.75 this morning. The reasons are numerous as to why the stock market is failing to find “value” in Cisco shares.

First and foremost, analysts at the consensus Thomson Reuters estimates are $0.38 EPS and $10.98 billion in revenues; next quarter estimates are $0.39 EPS and $10.99 billion in revenues.  As Cisco has a restructuring, layoffs, a poorly executed turnaround as the enterprise market takes it right on the chin, and as austerity measures are killing government upgrade orders, the fix is in: everyone is worried that the company will not just miss estimates but also guide down even lower.

The big killer is what has happened to peers.  Brocade Communications Systems, Inc. (NASDAQ: BRCD) closed at $4.89 before it recently gave a poor earnings report and now “The Poor Man’s Cisco” trades under $3.50.  Juniper Networks, Inc. (NYSE: JNPR) traded at $31.17 before earnings and fell to $24.66.  Juniper shares almost broke $20.00 at the peak of selling on Monday with shares back up above $21.30 today.  Riverbed Technology, Inc. (NASDAQ: RVBD) fell to $32.05 from a pre-earnings close of $41.40 before its dismal earnings and shares are even lower around $24.00 today.

Alcatel-Lucent (NYSE: ALU), the perpetual turnaround that been the biggest networking stock gainer in 2011 closed at $4.91 the day before its earnings only to close at $3.91 after earnings and shares hit a low of $3.00 on Monday with a current share price of $3.35.

The pattern is the same at most networking equipment providers: light earnings, light guidance, weak government spending, and international disruptions and pushouts by telecom and communications service providers.  The market believes that if the companies which had been chewing at Cisco’s heels for a year are in trouble, then the company in a restructuring that has been in trouble has to be in even worse trouble.

Another thing acting against Cisco is that it really prefers to buy back shares over and over rather than generating a solid dividend for shareholders after initiating too weak of a dividend policy.

With shares having hit a 52-week low today, we won’t bother offering any chart outlooks.  We know what that says.  Analysts now have a consensus price target of roughly $20.00 since this one has been downgraded and had estimates cut.  The big research call in recent days and weeks was when Goldman Sachs, a firm which had been very cautious on Cisco before for quite some time, raised its rating to “Buy” with a $21.00 price target.  Shares were around $16.00 after the upgrade, so that has failed to garner support as well.

The one issue that may be a driving factor ahead is that Cisco does represent extreme value at this point in its turnaround.  This is one of the most battered DJIA component stocks so far in 2011 and to say that sentiment is negative is an understatement.

Now the question becomes one of how Cisco can “Sell Value” to new shareholders.  At eight to nine-times earnings expectations, how bad can it be?  The answer depends by how much Cisco misses earnings and/or guides lower in the quarter or year ahead.  Investors are going to have to deal with lower margins if Cisco wants to win back some lost business.

JON C. OGG

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