Is Cisco Undervalued? At Least One Analyst Thinks So.

Shares in the networking giant Cisco Systems are trading at more than 38 percent off their 52-week high and haven’t recovered a bit since investors shunned it following an earnings report that contained a relatively negative outlook. Today, in a research note to clients, Brent Bracelin, an analyst with Pacific Crest Securities in Portland, Ore., made the case that investors aren’t giving it enough credit.

The way Bracelin sees it, sales in Cisco’s new business lines such as Unified Computing System–Cisco’s cloud hardware offering–as well as wireless LAN and collaboration products, could triple to $10 billion in 2013 from $3.3 billion in 2009, and could generate a combined operating margin of 25 percent and could account for 20 percent of overall sales.

Too iffy for you? There’s more. Yes, investors are clearly unhappy with the drop in sales of switching products, historically an important Cisco business segment and indeed its biggest segment so far, accounting for 31 percent of sales last year. And they should be unhappy about it. But? Cisco’s non-switching business is on pace to deliver $30 billion in sales this year, Bracelin says, more than double what it did in 2005. This means the non-switching business is growing at a compound annual growth rate of 12 percent, more than double the five percent seen in switching. If all goes well the contribution to earnings of the non-switching business to per-share earnings could be 97 cents in fiscal 2011 and could reach $1.50 by 2014.

Still not convinced? There’s more. The sell-off has pushed Cisco’s valuation metrics to significant lows versus its peers in the tech industry. At $17 a share, Cisco’s market cap of $94 billion works out to an enterprise value to EBITDA ratio of less than five. By comparison, Microsoft trades at more than six times EV/EBITDA, IBM’s ratio is north of eight, Oracle’s is about 10 and Qualcomm’s is nearly 13.

And? That $40 billion in cash that Cisco has on its books is worth more than $5 a share. Meanwhile, investors have turned up their noses at Cisco’s switching business to such an extent that they now value it at only $3 a share while the non-switching business is valued at more than $9 a share. In 2008, the switching business was valued at more than $8 a share. “The sell-off, based on competition and margin erosion, now appears overstated,” Bracelin wrote.

So what does he think it’s worth? Add up all the parts and you get a company that could be valued at anywhere from $20 to $28 a share. And that’s assuming the value of the switching business improves only a little bit. All in all, Cisco shares could be undervalued at anywhere from 17 percent on the low end to 63 percent on the high end.

Investors, however–at least for today–didn’t buy Bracelin’s argument. Cisco shares fell 11 cents to close at $17.04 a share. That’s only seven cents a share higher than its 52-week low from last month.