Technology

Good Cisco Earnings Is Good News for These 3 Companies

Lee Jackson

Published: May 20, 2016 10:25 am

Last Updated: January 13, 2020 7:47 am

If there is one company that Wall Street almost always has a hard time getting a solid read on it is Cisco Systems Inc. (NASDAQ: CSCO), and this earnings period was no exception. While many feared that a slowdown in enterprise and carrier network spending would end up being a drag on earnings, the opposite was the case as the networking giant came in with a report that surprised to the upside on the top and bottom lines.

In a new research report RBC has its usual comprehensive look at the companies that are vendors to Cisco. They also chart who would be the biggest benefactors not only from the current quarter’s strength, but from the positive business silos that are benefiting the company going forward from the company product shift to software and recurring revenue.

Three companies look to have benefited, and one is the top pick at RBC in the sector.

Amphenol

This is the top pick in the sector and has remained a favorite at RBC for some time. Amphenol Corp. (NYSE: APH) is one of the world’s largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors, interconnect systems, antennas, sensors and sensor-based products and coaxial and high-speed specialty cable. Amphenol designs, manufactures and assembles its products at facilities in the Americas, Europe, Asia, Australia and Africa and sells its products through its own global sales force, independent representatives and a global network of electronics distributors.

The company has a diversified presence as a leader in high-growth areas of the interconnect market, including: automotive, broadband communications, commercial aerospace, industrial, information technology and data communications, military, mobile devices and mobile networks. RBC notes that the company’s IT/ Data Communication division is 19% of total revenue, and the company does 4% or so of its total business with Cisco.

Shareholders receive a 1% dividend. The RBC price target for the stock is $61, and the Thomson/First Call consensus target is $62. The shares closed Thursday at $55.35.

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This stock is well regarded and RBC has it rated Outperform. Flextronics International Inc.(NASDAQ: FLEX) is a leading end-to-end supply chain solutions company that delivers design, engineering, manufacturing and logistics services to a range of industries and end-markets, including data networking, telecom, enterprise computing and storage, industrial, capital equipment, appliances, automation, medical, automotive, aerospace and defense, energy, mobile, computing and other electronic product categories. Flextronics is an industry leader with more than $26 billion in annualized sales.

Top analysts see the improvements at Cisco as a positive at the company, which does annually between 6% and 8% of sales via switches, routers and infrastructure equipment with Cisco. RBC does point out that the Flextronics business with Cisco is more concentrated on the networking giant’s traditional products.

RBC has a $13 price target, but the consensus target is higher at $14.27. The stock closed most recently at $12.22.

Jabil Circuit

This is another company that does significant business with Cisco. Jabil Circuit Inc. (NYSE: JBL) is the ultimate outsourcing stock for technology and more. The company offers electronics and mechanical design, production, product management and aftermarket services to companies in the aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, solar, storage and telecommunications industries.

RBC analysts estimate the company gets 7% to 9% of its overall sales from Cisco on sales via routers and switches. The stock trades at 4.4 times EV to EBITDA, has an 8% gross margin number and posts a 3% EBIT margin. Also, it is rated Sector Perform at RBC.

The RBC price target is posted at $21, and the consensus target is $22.11. Shares closed Thursday at $17.19.

The resurgence at Cisco not only bodes well for these top companies, but industry peers of the company as well. With an ever increasing need for latency, storage, security and data, we remain perhaps at the beginning of a continuing huge build-out to accommodate current and future needs for cloud computing.