3 ETFs to Buy if You Think Cisco Beats Earnings

Now that Cisco (CSCO) has been firmly under Chuck Robbins' control for nearly a year, investors will be looking to hear how Robbins' tweaks to the business are going and whether emerging markets will continue to be a sore spot for the tech giant.

Oppenheimer analyst Ittai Kidron did several channel checks throughout the U.S. and Europe and noted that emerging markets are still difficult for the networking giant. "Emerging markets remain challenged, and even in North America and Western Europe, demand trends appear mixed," Kidron wrote in a note to clients. "Although the environment is clearly not easy, we believe management was appropriately conservative in guidance."

Cisco is shifting its business from being just one focused on networking and telecom equipment, to one that is focused on software and services.

There's also been a key emphasis on software defined networking (SDN), a trend that has eaten at Cisco's business, as companies like Facebook (FB) , Google (GOOG) (GOOGL) and others continue to innovate in the Open Compute Project, open sourcing code for networking projects.

Credit Suisse analyst Kulbinder Garcia has consistently said that SDN is a threat to Cisco's high gross margins, as it undercuts the "most profitable part of the IT stacks." Cisco has introduced several key initiatives in SDN, but so far, none have taken off. However, Garcia thinks Cisco can do more.

"We believe it will introduce competition at multiple points in the network and while the impact will take time, the threat will be very real, shrinking gross profit dollars for the entire networking stack," Garcia wrote in a note to clients. The analyst has a underperform rating and a $25 price target on the San Jose-based Cisco.

The company has also been losing market share to competition, such as Arista, Juniper Networks (JNPR) and Whitebox, highlighting the need to differentiate in software and services, particularly in the cloud.

Analysts surveyed by Yahoo! Finance expect the company to earn 59 cents a share on $12.34 billion in sales when it reports fiscal first-quarter results on November 16.

Additionally, investors will be looking to hear how the company's business is doing in China, which has been a struggle for some time. Competition in the market is extremely heavy and Sino-American relationships has hurt its business in the world's most populous nation.

With President-elect Donald Trump taking office in January 2017, Cisco may also provide clues on how it sees tax reform and repatriation going. Cisco has a considerable chunk of its cash overseas and any move towards bringing that cash from overseas at a low tax rate could be used for increased spending on R&D, buybacks, dividends and acquisitions. 

If investors like what Cisco has to say about its most recent quarter as well as guidance for the next one, these three ETFs may benefit.

iShares North American Tech-Multimedia Networking ETF

Cisco makes up 8.45% of the iShares North American Tech-Multimedia Networking ETF (IGN)  which has $74.5 million in assets under management and has a 0.47% expense ratio.

Credit Suiss's Garcia expects the company to in mostly in-line with consensus as well, earning 59 cents a share on $12.39 billion in sales. However, it's all about the outlook for IT spending, which has been somewhat muted.

"We continue to interpret the IT spending outlook as mixed," Garcha wrote in a note to clients. "YTD 2016 we have seen weak IT spending indications from large bellwethers, including IBM/INTC, and mixed service provider spending trends, seen through revenue results of JNPR/FFIV (on the better side) and NOK/ERIC (on the weaker side)."

Credit Suisse rates Cisco shares underperform with a $25 price target.

First Trust NASDAQ Technology Dividend Index Fund

The First Trust NASDAQ Technology Dividend Index Fund  (TDIV) has Cisco make up 7.84% of its $562.7 million portfolio and charges investors a 0.5% expense ratio.

First Trust Nasdaq Cybersecurity ETF

The First Trust Nasdaq Cybersecurity ETF  (CIBR) has Cisco make up 5.65% of its $107.5 million portfolio and charges investors a 0.6% expense ratio.

Oppenheimer's Kidron is essentially expecting an in-line quarter based on his checks. "Of contacts, 28% pointed to QoQ revenue growth vs. 14% to a decline," Kidron wrote in a note to clients. "Peer results suggest a continued mixed macro backdrop, with several pointing to Brexit-related challenges in the UK/Europe. Consistent with this, our checks point to better activity in NA than Europe. Despite these challenges, we think management was appropriately conservative in guidance."
 
The firm has an outperform rating and a $34 price target on Cisco.

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