Some investors are looking to sink their teeth into Cisco Systems (CSCO) as the stock slides ahead of earnings.
The dip in the shares is providing a decent entry point for many investors looking to hop aboard the San Jose-based switch king as it looks to continue a run of nearly 20% from its Christmas Eve bottom.
Read-Through Results
One of the key factors to consider, based on Cisco's position late in the earnings season, is the data we have so far.
To start, strategic U.S. Cisco partners Presidio (PSDO) and ePlus (PLUS) provide an important starting point for forecasting.
ePlus, a Virginia-based IT company and top-10 customer and supplier to Cisco, noted its relationship with the company as vital and amicable in its earnings call just last week.
"Cisco percentages for the quarter was approximately 40," CEO Mark Marron said. "Cisco has been very open to continue to work with us, as they've made the changes on their end. Based on the relationships we've had prior, there's still a lot of folks there at Cisco that we're able to continue to leverage those relationships. And based on the amount of revenue we do across all of their product lines, so it's been fairly easy to get together with their new management teams both in general settings but also in individual settings with our ePlus management team and the Cisco management team."
Presidio, a New York-based cloud security and digital infrastructure company that counts Cisco as both a partner and supplier, made similar comments.
"What we saw through Q2 was a normalization of supply chain around the Cisco 9000 and Cisco 9k platform, which is their flagship entry into software-defined networking in their ACI platform along with the Cisco 9k hardware. So, we saw a normalization of supply chain," CEO Robert Cagnazzi told analysts on Feb. 6. "The backlog year-over-year demonstrated the continued acceleration in this refresh cycle. The backlog year-over-year is up 76%."
With Cisco's supply normalizing and the demand on its key partners only pumping upward, it makes a strong read-through for the stock's trajectory to the positive end.
"We view these results as supporting our broader Cisco outlook and view Cisco's CAT9K as a key platform refresh for customers that can pull in broader Cisco spend," KeyBanc analyst Alex Kurtz said after thumbing through read-through results.
He set his price target at $53 and bestowed an "Overweight" rating on the stock based upon these key indicators.
Analysts looking at broader based industry checks echoed the bullishness.
"Checks suggest demand from enterprises remained robust, with continued traction from Cisco's Catalyst 9000 (CAT9K) more than offsetting weakness in its Middle East business and its server business," Raymond James analyst Simon Leopold explained. "We continue to like the stock considering valuation and its competitive position."
Leopold added his own "Overweight" rating and a similarly bullish $52 price target on his independent checks.
Charging Sans China
One of the key catalysts that remains up in the air is Cisco's position as a competitor with Huawei Technologies.
As Huawei comes under further scrutiny, it could open the door for Cisco to seize on a wide-open networking market.
Cisco is likely eager to do so as well, as the company has not only battled Huawei in the industry, but in the courtroom.
Cisco sued Huawei in U.S. court in 2003 for theft of designs and the actual software code, which Huawei partially admitted to. The suit was settled without an admission of guilt in 2004, though statements from Cisco accused the Chinese giant of stealing entire designs for its networking properties.
"The fact that these guys compete against Huawei fires me up a bit," Real Money contributor Stephen "Sarge" Guilfoyle said, outlining bullish options play he is eyeing ahead of the release.
If restrictions due indeed begin to come in from European regulators, one could expect many nations to follow suit.
"If [Huawei] equipment is co-located where we have important American systems, it makes it more difficult for us to partner alongside them," Secretary of State Mike Pompeo said in Hungary on Monday, furthering this end. "What is imperative is that we share with them the things we know about the risks that Huawei's presence in their networks present."
Hungary's trade minister Peter Szijjarto did push back on Pompeo, but the government is putting its weight behind a major catalyst for Cisco.
Additionally, only 3.3% of Cisco's revenue comes from China and FactSet notes that none of its top-10 suppliers are Chinese-based, meaning the company is largely insulated from trade war tit for tat. This is brought further into view in terms of how clearly the company has been able to navigate tariff troubles in its supply chain.
The real concern on macro mitigation may be closer to home, in terms of maneuvering amidst a government shutdown that could curb results. The reopening of the government this week should end up on the positive side moving forward.
So, while the stock may be tempering gains into its earnings release, there are sustained reasons to remain steadfast alongside Cisco.
(Cisco Systems is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells CSCO? Learn more now.)
