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Tickers in this Article: CSCO, ALU, JNPR
Cisco Systems (Nasdaq:CSCO) released its third quarter numbers last week, with earnings that beat consensus estimates. Sounds great, but the market has actually traded the stock lower since the news came out.

To me, this seems a little off. The market looks nasty right now, but that's why investors should be pleased with companies that are performing well. With the strong quarter that Cisco had, I think the market has this one wrong.

Continued Strength
Amid all of the troubles in the market, Cisco was able to produce earnings that exceeded the market's expectations. The networking equipment supplier reported earnings of $2.2 billion or 35 cents per share for the first quarter of the 2008 fiscal year. Excluding one time charges, the company earned $2.5 billion, or 40 cents per share, 4 cents more than consensus estimates.

Cisco's earnings were led by strong sales during the first quarter, which came in at $9.6 billion, while analysts were expecting $9.54 billion. The company did not blow away these numbers, but it still had a strong quarter, beating estimates on the top and bottom lines.

Caution Over Reason
Cisco showed great growth when the numbers are compared to last year as well. Sales grew at 16.7% over a year ago, and earnings per share grew by 34.6%.

This company is in a great position going forward. So, why did the market respond by sending shares plummeting and erasing about $30 billion of market cap in a week? There are two reasons, and while markets are shaky and people are concerned, I really feel the beating Cisco has taken is unjustified.

The first reason is that in its earnings press release, Cisco CEO John Chambers was not as bullish as usual. He left earnings guidance unchanged looking for growth in earnings between 13%-15% for the year. The street has grown accustomed to Chambers constantly upping his targets and being very optimistic about the economic environment. Well, it shouldn't be news to anyone that the economic environment is not as good as it was a year ago, and I commend Chambers for being cautious. If he left guidance unchanged along with quarterly numbers that beat on all fronts, he would expect that at worst the company's stock would trade flat. On the other hand, if he guides higher and the economy hits Cisco harder than expected, then he would expect the shares to drop big. This was a cautious and wise decision that just did not work out as it should have.

The second reason was that during the earnings call Chambers commented that orders from banks have eased. Is that a surprise to anyone? It is not to me, but apparently investors were not expecting banks, who are taking losses left and right, to attempt to cut costs.

The drop in price presents an opportunity to invest in a strong company at a discount. The segment of the company affected by fewer bank orders only makes up about 13% of revenues. Cisco is now trading in-line with the industry in terms of price-earnings ratio, with a market cap of around $180 billion, dwarfing competitors Alcatel-Lucent (NYSE:ALU) and Juniper Networks (Nasdaq:JNPR) with $18 billion and $15 billion respectively. Cisco is in a great position to perform going forward.


The Bottom Line
The market overreacted with this one. There is a lot of bad news, but it is important to separate the bad news from the good/neutral news. Sure, the quarter could have been better and it would have been nice if Chambers increased the company's guidance, but Cisco still had a very strong quarter. In a shaky market, it is important to look for companies that are showing strength, and it is even better to buy them on a dip, such as this one.

For related reading, see Surviving Bear Country.

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