The once-drab communications equipment sector has been full of bright spots this earnings season. Last Thursday brought a resounding profit from telecom hardware giant
, on the heels of last month's report of a surging top line at router maker
. All signs point to a long-awaited pickup in network spending by big telcos.
So investors are understandably eager to see what Cisco has to say about its fiscal second-quarter results, due after the market closes Tuesday. And by all accounts, Cisco should post solid numbers. Still, some observers note the rising excitement with some anxiety. They point out, for instance, that Cisco sells more of its gear to corporate information techonology departments, where spending remains slow. And any perceived shortfall could be punished harshly.
"With expectations so high, there is no room for any company to disappoint -- either on the reported results or on the guidance going forward," says Blaylock & Partners analyst Gabriel Lowy, who rates Cisco a hold.
On Monday Cisco rose 49 cents to $26.20, putting the stock up 10% for the year.
Of course, anxiety is hardly Wall Street's main emotion surrounding Cisco right now. On Monday, a pair of analysts who have recently checked Cisco's sales channels reported a healthy flow of Net goods, raising their stock price target to $30.
CEO John Chambers, whose
exuberance often boiled over a few years ago, now has become the master at
more measured optimism. In November, Chambers said sales for the quarter ended Jan. 25 would rise 2% from first-quarter levels.
But since then, analysts have pushed expectations to a 4% gain. A consensus tally calls for earnings of 17 cents per share on sales of $5.3 billion, according to Thomson. And traders who try to keep a finger on the quickly shifting market sentiment say the so-called whisper number is greater than 6% sequential growth for the latest quarter -- putting the top-line expectation at more than $5.4 billion.
And as far as outlook, analysts and traders alike seem to agree that the seasonally weak third quarter will yield mere 1% to 2% top-line sequential growth. A consensus average calls for an 18-cent-a-share profit on $5.4 billion in sales.
Recent earnings reports from
, Nortel, Juniper and others point out a growing separation between networking gearmaker
winners and the rest of the pack. Nortel and Juniper, for example,
happen to sell some of the next-generation hardware toward which phone companies are shifting their spending.
Lucent, by contrast, saw strong demand for its wireless equipment, but not nearly enough to offset weak sales across the rest of its businesses.
And some observers suspect that Juniper has been filling orders that Cisco can't, for large-capacity Internet routers that phone companies are using to manage increasing volumes of Internet protocol, or IP, traffic. Cisco's highly anticipated huge fast router, or HFR, which would fit that big need, is already late to the market. Analysts such as Lehman Brothers' Tim Luke don't expect introduction until sometime next year.
But while breaking into the phone-supplier market has been challenging for Cisco, the San Jose, Calif., computer networker is likely to speak of encouraging signs in other areas. For example, one investor touring India's surging IT market reports that Cisco is coming up big as a supplier to the growing call-center market.
Of the average $8,000 spent per employee for a call center, "Cisco is capturing roughly 25% of it for routers" and other gear, says the money manager. He nonetheless calls the stock "too rich to play in" and holds no positions.
This, of course, brings the issue back to Cisco's valuation. Optimists put Cisco's 2004 top-line growth rate at 20%. That's an attainable target, should the economy and business IT equipment spending pick up. But it could also prove to be a tall order with little margin for error.