Cisco Systems (Nasdaq: CSCO) Stock: Today's Earnings Won't Tell the Whole Story

Analysts are looking for the networking gear maker to earn $0.46 a share for its fiscal second quarter, which would be a 9.8% drop from the same quarter a year ago. Revenue is expected to come in at $11.04 billion - an 8.9% drop from the year-ago quarter.

Cisco will probably beat those expectations - it has beat the Street by an average of $0.02 a share for four straight quarters - but those numbers obviously are going in the wrong direction.

And analysts have been mostly negative on the company.

"Cisco has struggled recently due to issues in emerging markets, with its set-top box business, and as it refreshes core products," Janney Capital analyst Bill Choi wrote in a note to clients. "We see only some of these issues fading with time, and believe that the company's positive strategic moves and increasing focus on execution will only offset some of the pressures on growth."

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In addition to weakness in emerging markets, rivals Juniper Networks Inc. (NYSE: JNPR) and F5 Networks, Inc. (Nasdaq: FFIV) have been nibbling at Cisco's market share.

What's more, Cisco faces an even bigger threat on the horizon: software-defined networks (SDNs) that offer a cheaper alternative to the hardware-based networking equipment that is Cisco's bread-and-butter.

Finally, Cisco is still trying to fight its way out of "laggard" status. The world's most valuable company by market capitalization in the late 1990s, Cisco stock went flat after the dot-com bubble burst and has been searching in vain for growth ever since.

With those kinds of headwinds, one might expect not just a weak earnings report today, but a major slump in the price of Cisco stock.

And yet that hasn't happened...

Over the past month, Cisco stock is up 2.58%, trading at about $22.77 midday Wednesday. And over the past year, Cisco stock is up 8.7% (although it is down somewhat from its 52-week high of $26.49).

If Cisco's business is in such trouble, why isn't the stock collapsing?

The answer is that Cisco is a company in transition. It's true that its traditional business is under pressure. But company management realizes what's happening and is moving toward taking advantage of the new opportunities created by the changes in the tech landscape.

Over the past year, Cisco has made several key acquisitions to allow it to move into such areas as the cloud (Meraki), SDNs (Cariden), and cybersecurity (Sourcefire), which not only offer growth but higher margins than its traditional business of networking hardware.

The combination of these acquisitions and the slow erosion of Cisco's old business are going to make for some glum earnings today, and maybe even for the next couple of quarters.

Whether the strategy pays off won't be clear for a year or two, but the moves look promising. At least Cisco management realized that sitting still was a death sentence and is taking aggressive action.

If the company does not deliver a significant earnings beat and more positive guidance, Cisco stock could be under some pressure in the short term, but that just might be a buying opportunity.

With a P/E of just 12.4, and a forward P/E of just under 11, Cisco stock could already be considered cheap.

Once Cisco's strategy kicks in, the higher margins and better cash flow will start to be reflected in the earnings, which should start nudging Cisco stock higher.

"The financial model remains strong, and the new products could add upside," Brian Marshall at ISI Group told Barron's. "At this price, the stock has more upside potential than downside."

Can #Cisco make a comeback, or is it "dead money"? Voice your opinion on Twitter @moneymorning or Facebook.

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Related Links:

• Barron's:
  Cisco Battles Back
• Marketwatch:
  Will Cisco Spook Wall Street Again?
• The Street:
  Cisco Remains a Buy Ahead of Earnings