The downside is that Cisco has to deal with a vast amount of competitors. One example is Alcatel Lucent SA (ADR) (NYSE:ALU). The company owns Bell Labs, one of the best R&D houses in the communications industry, with more than 29,000 patents.
Furthermore, according to the second quarter earnings presentation, the company experienced a 9% growth rate in network solutions, well above Cisco. With $19 billion in revenue per year, considering that the current market cap stands at $6 billion, Alcatel Lucent SA (ADR) (NYSE:ALU)’s low price/sales ratio of 0.3 could seem way more attractive than Cisco’s 3.0 ratio.
Luckily for Cisco Systems, Inc. (NASDAQ:CSCO), Alcatel Lucent SA (ADR) (NYSE:ALU)’s margins of 1.79% are well below Cisco’s outstanding 22% profitability. Alcatel Lucent SA (ADR) (NYSE:ALU) is in the loss zone but its traditional strong research muscle and recent sales in China (the company expects to launch more than 200,000 LTE active base stations through China Mobile) should not be underestimated.
Owner of one of the most powerful network automation tools for data center operations, competitor Juniper Networks, Inc. (NYSE:JNPR) should also be watched closely. Continuous improvements in its networks solutions caused revenue to jump 7.2% from the second quarter of 2012, as reported in the second quarter earnings for this fiscal year. The combined switch and router product revenue growth was 14% year over year, well above Cisco.
However, its network security product revenue declined 20% to $126 million. Clearly, Cisco’s recent acquisition of cyber-security company Sourcefire for $2.7 billion won’t make things easier for Juniper Networks, Inc. (NYSE:JNPR) in this segment, as Sourcefire latest figures showed its revenue increased 35% year-over-year, probably at the expense of Juniper Networks, Inc. (NYSE:JNPR).
Finally, with a much higher price-to-earnings ratio than Cisco, Juniper Networks, Inc. (NYSE:JNPR) will need to show the market it can grow fast enough to hold its market valuation. Such market pressure will be hard to deal if Cisco keeps acquiring early stars.
Final foolish thoughts
The latest earnings call showed solid results. Cisco’s fundamentals remain strong. However, the market decided to pay more attention to the short-term moderate forecast. Here, it’s important to remember that the recent forecast was weak not because fundamentals have changed, but because it accounts for a global contraction in demand for IT solutions and the current portfolio mix transition that Cisco is experiencing.
Cisco’s long-run value remains intact. With one of the lowest price-to-earnings ratio in the industry, a strong balance sheet and safe growth rates for the next years, the current negative sentiment should be seen as nothing else but a great entry point.
The article This IT Company Just Became Dirt Cheap originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems.
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