Will Cisco Earnings Surprise?

Even though Cisco Systems (NASDAQ:CSCO) is not scheduled to report its fiscal second-quarter results until after the markets close on Wednesday, a modest bull case is already mounting for the company. Times may be tough, but Cisco is expected to do the best it can under the circumstances.

Some analysts are more bullish than others, but Topeka Capital Markets’ Brian White takes a moderate view. White thinks that the networking equipment manufacturer will deliver another quarter of strong margin execution and meet both the firm’s sales and earnings per share estimates, outlining his reasoning in a research note published on February 12.

Topeka expects Cisco to post revenue of $11.96 billion, slightly below the Street’s forecast of $12.06 billion, and generate earnings per share of 47 cents. These expectations may only represent year-over-year growth of 1 percent, but they are still far better than the fiscal second-quarter results the company has posted over the past five years.

However, despite the likelihood of a positive performance from Cisco, White acknowledges that uncontrollable economic conditions put pressure on the company during the last quarter. “We expect strong execution but not strong markets,” he writes. “We expect Cisco to control what it can but we anticipate a muted demand environment to be discussed on the [earnings conference] call.”

White believes that the company’s quarterly report will show muted demand in Europe, a region that accounts for 20 percent of Cisco’s business, and the firm also has low expectations for China. But the U.S. enterprise and carrier markets are “likely to outperform,” he adds, although not to the same extent as they did in the previous quarter.

White argues that soft trends in the tech supply chain will affect many businesses in the industry this earnings season. “Although not all companies highlighted this weakness, there seemed to be more of a consensus around softness than strength,” he writes.

In terms of sales, White predicts that NGN Routing sales, which contributed 17 percent to the first fiscal quarter’s results, will decrease by 2 percent. Switching sales are also expected to decrease by 3 percent quarter-over-quarter, but growth will come from newer products in sales and services, which are forecast to increase by 5 percent and 2 percent, respectively. The company’s routing and switching business results will be examined carefully to see whether growing traction for products from rival Juniper Networks (NYSE:JNPR) has hurt Cisco’s market share

Cisco’s routing and switching businesses have become increasingly important as the company has dealt with the tough market conditions by focusing on these two core areas rather than following an earlier plan to diversify its business.

Topeka holds a Buy rating on shares of Cisco and a $23 price target. The stock, which is currently trading around $20 per share, has gained close to 25 percent in the past three months due to increased optimism for a potential revival in U.S. business spending.

Some analysts are even more bullish than White. In light of the Street’s high expectations for revenue of $12.06 billion and earnings per share of 48 cents, Raymond James analyst Simon Leopold reiterates an Outperform rating on the shares and a $25 price target. After surveying economic data and looking at supply checks, he says in a research note seen by Barron’s that the firm expects Cisco to meet both top-line and bottom-line estimates. Leopold writes that the “data points largely imply continued uncertainty yet a stabilizing environment.”

Citigroup’s Kevin Dennean also reiterates a Buy rating and is increasing his price target from $21 per share to $24.

Don’t Miss: Is ON Semiconductor Likely to Outperform?