NEW YORK, Nov 5 (Reuters) – Investors will focus on whether Cisco Systems Inc (NASDAQ:CSCO) Chief Executive John Chambers, who spooked Wall Street last quarter with unusually cautious comments about the technology business, will regain some of his usual cheer when Cisco reports earnings next week.
The network equipment giant and sector bellwether is expected to deliver a strong set of results and an upbeat outlook. That, and a vote of confidence from Chambers, could boost its shares, which have languished in the past three months. A positive outlook could also raise hopes for a stronger recovery ahead in the overall technology sector.
Strong caution, like his warning last quarter of "unusual uncertainty," would weigh on Cisco’s shares, which many analysts see as undervalued considering the company’s long-term prospects.
"I think he might move a little bit towards more positive, although not much. I think he’s going to be optimistically cautious," said Avian Securities analyst Catharine Trebnick.
She and other analysts see corporate IT budgets increasing but also note that the recovery from the recent economic downturn is still patchy.
U.S. GDP in the third quarter expanded at a 2 percent annual rate, helped by consumer spending and business investment, but unemployment remains high and few expect a surge in business activity ahead.
Orders at Cisco, which makes routers and switches used to direct Internet traffic, is seen as an earlier indicator of technology spending due to the wide range of its clients.
While known for expounding optimistically on the future of the Internet, Chambers is a well-regarded reader of economic trends. He was also one of the first Silicon Valley executives to admit to the impact of the financial crisis.
MUST-HAVE OR TOO MATURE?
Analysts expect the results, due on Nov. 10 after the market closes, to show $10.73 billion in revenue for the company’s fiscal first quarter, ended Oct. 30, up 19 percent year-on-year.
They also expect Cisco to forecast second-quarter revenue of $11.08 billion, according to Thomson Reuters I/B/E/S, showing Cisco moving well beyond the worst of the downturn.
Analysts say long-term demand looks healthy as more consumers go on the Internet, not just to email or browse websites but also to download movies and songs, and chat online –all activities that require advanced network equipment.
Cisco shares have underperformed the technology sector this past quarter, barely moving over the past three months despite the company’s announcement in September that it would soon begin paying dividends.
The shares closed on Thursday at $24.21, slightly above 13 times earnings forecasts for this fiscal year, but lower than its historic average of close to 19 times earnings and its peers’ average multiple of above 25.
"There’s no question, considering the fundamentals, that the company is undervalued," said Joel Achramowicz, analyst at Blaylock Robert Van, with a "buy" rating on the shares.
But he also said investors may be worried that the $40 billion-a-year company, already a market leader in network gear, was already past its strongest growth days. He compared it with Apple Inc (NASDAQ:AAPL).
"The thing about Cisco is it’s been on autopilot for a long time. If you look at Apple, the iPod changed the music world, and the iPhone upset the whole paradigm of phones, and then of course there was the iPad. So you get three paradigm-shifting introductions," Achramowicz said.
"I think somehow the market’s waiting for Cisco to show it too can be a $100 billion company, and to show them that they have some new strategy that reflects a step function in operating metrics."
Cisco has been expanding into new areas like consumer products, recently acquiring the company that makes the Flip videocamera.
Those products still account for a small portion of the overall business. But Cisco says such investment, as well as increasing demand for network gear on the back of exponential growth in online traffic from mobile phones and video streaming, would keep its business growing.
It has forecast revenue growth of 12 percent to 17 percent in each of the next few years.
Channing Smith, co-portfolio manager of Capital Advisors Growth Fund, believes management will be proven correct.
He sees Cisco not only benefiting from current trends, but also from technologies of the future, like "smart grids" designed to make utilities systems more energy efficient, and "smart" appliances that turn themselves on and off.
"When you consider those opportunities in front of them, and that emerging markets still have to build out their infrastructure, one could argue that Cisco’s best growth days are probably still ahead of them," Smith said. (Editing by Steve Orlofsky)