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Tickers in this Article: CSCO, JNPR, ALU, VZ, T
Cisco Systems (Nasdaq:CSCO) shareholders have little to be happy about these days. Back in November, the company cautioned that demand for networking gear was falling fast and could damage growth. Indeed, Cisco's second-quarter results, released February 5, were dismal. Revenue dropped 7.5% while earnings plunged 27% from the same period last year. CEO John Chambers expects revenues for the current quarter to fall 15-20%. Cisco shares are down about 25% since August as investors flee from the stock. IN PICTURES: World's Greatest Investors

Tight credit markets and a shaky economic outlook make it tough for enterprises and communications companies to keep buying in pricey networking technology. In late January, Cisco's closest rival, router-maker Juniper Networks (Nasdaq:JNPR), slashed its Q1 sales guidance by 13% amid steep spending cuts at Verizon (NYSE:VZ) and AT&T (NYSE:T). Alcatel-Lucent (NYSE:ALU) warned this week that spending could fall
8-12% in 2009. Nortel Networks, finally undone by the recession, filed for Chapter 11 bankruptcy last month.

Cisco Has Long-Term Potential
The news is downright horrible. But now is not the time to follow Cisco sellers to the exits. Given long-term growth drivers and Cisco's hefty market clout,
the stock is priced for patient investors willing to wait for things to turn around. (For more, see Technology Sector Funds.)

Here's Why
For starters, customers
cannot postpone network capex forever. At some point, enterprises will start spending again as they eventually upgrade their network systems to support "must-have" multimedia, web-based business models and e-commerce and tele-working applications. Sooner or later, telecom carriers and internet service providers will need to boost their investment in infrastructure to keep up with growing traffic loads on their networks.

When customers do start spending again, in all likelihood they will turn to industry titan Cisco. The company dominates the market for routers and switches - the basic building-blocks of internet infrastructure. Of course, feisty Juniper Networks is trying to grab a bigger chunk of the market, but its $3.2 billion in 2008 sales comes nowhere close to the $39.5 billion Cisco produced last year. The industry's 800-pound gorilla, Cisco will be first-to-the-trough when demand for technology eventually stages a comeback.

Strong Balance Sheet
Cisco is sitting on close to $26.2 billion in cash and just $6.3 billion in long-term debt. That kind of balance sheet strength is exactly what investors should be looking for in the current credit climate. It's also what customers are looking for. In this wobbly economic environment, big companies opt to do business with financially stable suppliers. (Knowing what a company's financial statements mean can help you analyze your investments. For more, read Breaking Down The Balance Sheet.)

Importantly, Cisco's financial firepower gives it the wherewithal to invest heavily in whizzy, next-generation technologies like cloud computing and software-as-service (SaaS) that will set the company even further apart from competitors. At the same time, Cisco could use its cash hoard to continue acquiring companies, placing an immediate emphasis on building up its position in sexy consumer markets like home networking, digital TV and IP telephony.

Cisco Could Turn Out To Be A Bargain
Cisco stock has fallen about 25% since August. The stock changes hands for about 13 times estimated EPS for the July 2009 fiscal year.
Looking back to October 2002, after the dot-com bubble burst, Cisco bottomed out at $8.60 a share, or about six times the $1.40 per share of cash and short-term investments it held at the time. Today, even after spending billions to buy back stock, Cisco trades at just over three times its cash per share of approximately $5.

Bottom Line
Of course, Cisco can't escape the economic downturn and, given the market's frantic mood, the stock could fall further. That said, Cisco will likely emerge from the recession in a stronger position than when it entered. For investors willing to hold on, it may not be a bad time to tuck away some Cisco shares.

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