Analysts see signs of Cisco rebound
In a report issued Tuesday, Credit Suisse First Boston analyst Lissa Bogaty said she saw a possible "upside to estimates" for Cisco, based on reports that telecom carriers, Cisco's major customers, could begin "turning (the) spigots back on a little."
And SG Cowen Securities analyst Christin Armacost wrote that "long-term growth opportunities remain" for the stock, as the San Jose, Calif.-based company focuses on improving gross margins and cost controls.
Cisco shares rose 61 cents to $23.48.
Telecom companies have slashed spending recently, hurting equipment vendors. Beyond that, Cisco has been plagued by inventory issues; the company was forced to take a $2.25 billion write-off to deal with a glut of products.
A "particularly bullish remark" came from the general manager of Cisco's optical networking unit, Sanjay Pol, who gave the "impression that carriers, after freezing their budgets in the first quarter, were starting to selectively spend again," Bogaty wrote. She added that Pol suggested Cisco would begin shipping optical products as part of large contracts that have been in the works for some time.
Bogaty didn't raise her target price on the stock, currently at $25, noting that "(we) can't get carried away yet, because a downward bias to gross margin limits an explosive upside, in our view."
Pol was evidently taking a tour of Wall Street this week; a research note from UBS Warburg analyst Nikos Theodosopoulos also referred to a meeting with him. Theodosopoulos noted that the optical division accounts for only 5 percent to 10 percent of Cisco's total sales.
That could actually be good for the company--a new report from the Dell'Oro group found that optical equipment sales were off sharply in the first quarter of the year, according to Sanford Bernstein analyst Paul Sagawa.
Sagawa said in a research note that Cisco saw a 35 percent sequential drop in optical revenue, mainly due to the company's reliance on competitive local exchange carriers--companies that compete with established telephone companies--which have been having their own cash-crunch issues.
Indeed, Lucent Technologies, whose customer base is more weighted toward established carriers, may be better positioned to "weather the industry storm," Sagawa wrote.
He added that Nortel could be worse off. Nortel saw optical sales drop 52 percent sequentially in the first quarter. Sagawa faulted the "collapse" of the market for the high-speed equipment that Nortel sells. Essentially, everyone has finished building out their products, leaving Nortel hanging, he said.