Huge Hopes Sustain Cisco

Revved-up investors drove Cisco (CSCO Quote) shares to a 52-week high this week, in anticipation of an uplifting first-quarter earnings update Wednesday.

Now, as ardent fans wait to see whether Cisco can live up to the hype, even more eyes on Wall Street will be on the bellwether's hotly anticipated outlook, searching for clues to what's ahead for the tech sector.

Right or wrong, investors commonly believe that the computer networking giant will be among the first companies to benefit from a long-anticipated recovery in tech spending after a three-year slump. The surge in Cisco's share price has largely outpaced the techwide rally that started last spring. Cisco hit a 52-week high of $21.85 early Tuesday and later slipped 15 cents, to $21.56.

By most analysts' accounts, Cisco enjoyed a solid fiscal first quarter. The spark that lit up the current rally came in September, when CEO John Chambers said he saw higher-than-expected sales in August. Those trends seem to have continued through October, according to analysts.

Now, with demand stabilizing, orders picking up, and the backlog rising, some analysts, and obviously a number of investors, are convinced that Cisco's chatty chief may speak of continuing sales momentum. This has many wagering that Cisco will raise its second-quarter financial targets while giving its usual cautious optimism about a possible recovery.

"It's likely they'll have positive guidance for next quarter, but you will probably hear them try for their usual measured outlook," says CIBC World Markets analyst Steve Kamman, who has a neutral rating on the stock. CIBC has done banking for Cisco.

Analysts expect first-quarter earnings of 15 cents a share on sales of $4.8 billion, according to a Multex tally. While matching year-ago levels, those results would represent a 3% sequential sales improvement. The consensus outlook for the second quarter calls for 16 cents of profit on $5 billion in sales. That's 5% sequential growth.

"It will be interesting to see how the market interprets it," says Kamman. "I think overall tone will suggest a reasonable return to some spending recovery -- but not a return to bubble-era euphoria."

Singing Cisco Stock's recent rise

Among the areas analysts will try to probe is the progress of the Linksys unit, Cisco's recent foray into consumer electronics and home networking systems. While Cisco defends the move as a logical extension of its Internet gear business, critics charge that it is a desperate lunge at sales growth that will drag down the company's lofty 70% gross margins.