Cisco upgraded ahead of earnings

Shares of networking giant Cisco Systems gained Tuesday on an upgrade from Morgan Stanley ahead of the company's earnings report, due after the bell. Analysts expect Cisco to report a humdrum quarter.

Shares in the maker of switches and routers were up $1.01, or 5 percent, to $20.26.

Morgan Stanley upgraded the stock to "outperform" from "neutral," citing increased confidence in the enterprise business and new contracts with service providers. Analyst Christopher Stix gave Cisco a price target of $25 a share.

This isn’t the first time Morgan Stanley has issued a bullish note on Cisco (Nasdaq: CSCO). On May 2, the stock got a pop when Stix issued a research note saying corporate spending on networking equipment may be stabilizing.

Since last week, Stix said he has received more "encouraging feedback" from checks with Cisco's enterprise customers that point to a stabilizing business. About 65 to 70 percent of Cisco's revenue comes from sales to enterprise customers.

Two new contracts with service providers last week--China Telecom and Global Crossing--also indicate that the company's core router business is also picking up speed, Stix said.

As for the upcoming third-quarter report, Stix said he expects revenue and earnings to come in on target with the companies' pre-announcement at $4.7 billion and between a penny and three cents a share, respectively.

Stix said he's making the upgrade today not because he expects to see anything significant from tonight's report, but because "by the time we see Cisco's fundamentals recover, the stock will already have begun to rebound."

Stix hasn't observed anything that other analysts haven't--the only reason for his upgrade is a theory that the stock will move six months before the company's business improves.

Observance of the stock's past action "suggest(s) the stock anticipates changes in growth (positive and negative) by approximately six months," Stix wrote. "We believe that quarter-over-quarter growth will come in either the October or January quarter and year-over-year growth will recover in the April 2002 quarter, making it timely to acquire the stock."

Other analysts put a differnt spin on similar evidence.

Gruntal & Co. analyst Michael Perica downgraded Cisco Tuesday to "market performer" from "outperformer," citing a belief that shares do not "deserve a higher valuation and that likelihood of a rebound in business over the next four quarters remains low."

Perica also expects the company to come in on target with estimates in its third-quarter report, but cautioned investors to watch vendor financing commitments and gross margins.

Lehman Brothers analyst Tim Luke echoed the consensus that Cisco should meet its targets. Luke said that if management endorses its current projections for flat to 10 percent growth in July revenue, that investors may see this as a positive. "We believe following a more positive conference call, Cisco may trade to $23-$24 in the near term," he said.

Like Stix, Luke said Cisco's enterprise business is improving. But Luke's outlook for Cisco's service provider business wasn't as optimistic. About 35 percent of Cisco's revenue comes from service providers, which recently indicated they are cutting capital spending.