By market close, Cisco shares gained 61 cents to $17.76 after investors learned of an internal memo at Salomon Smith Barney claiming that both Sanmina and Flextronics are receiving more orders from Cisco in anticipation of stronger demand for network equipment. Sanmina and Flextronics sell components to Cisco Systems, Nortel Networks and other network equipment companies.
Analyst Alex Henderson, who covers Cisco at Salomon Smith Barney, was not immediately available to comment on the report, but a representative at Salomon Smith Barney confirmed that the memo existed and that the firm was "hearing (from Sanmina and Flextronics) that orders were improving."
"I'm not doubting that at all," said Roger Norberg, an analyst at J.P. Morgan H&Q. "It's not that big of an increase, but there does appear to be some improvement. Demand in general has gone from steadily down to sideways."
Sanmina shares gained $1.17 at $18.98, while Flextronics gained $1.76 at $24.91.
Other analysts were quick to point out that even though orders were improving, any new orders would be an improvement after several quarters of slumping sales and earnings for major network-equipment and contract-electronics companies.
"Cisco wrote off a lot of its inventory and stopped placing new orders because they had enough," said Michael Perica, an analyst at Gruntal & Co. "Now that they're starting to order again, it seems like an improvement. But it's difficult to say whether or not Cisco's overall business is improving."
On Wednesday, Sanmina fell a penny short of analysts' estimates in its third quarter, earning $31.9 million, or 10 cents a share, on sales of $776 million. It also lowered its projections for the fourth quarter and said it would take a restructuring charge in the fourth quarter to cover the costs of reducing its manufacturing capacity in North America.
On Monday, Sanmina shares took a hit after announcing it would shell out $3.9 billion to acquire competitor SCI Systems.
"I think what we're seeing with Sanmina today is a modest rebound from some of the selling that took place after the SCI deal was announced," said Lou Misciosia, an analyst at Lehman Brothers. "When I spoke to the company after the earnings call, they did say they were starting to see improvement in some (orders), but it's hard to say how much right now."
Any signs of improvement is good news for Cisco shareholders, who have watched the stock loose more than 74 percent of its value in the past year.
Cisco, which absorbed a staggering $2.25 billion inventory write-off charge in its third quarter, is expected to report on Aug. 7 a fourth-quarter profit of 2 cents a share on sales of $4.36 billion, down from a profit of 16 cents a share on sales of $5.7 billion in the year-ago quarter.
"I'm not completely confident Cisco will hit their numbers this quarter," Perica said. "It's very tough out there right now. However, when there is a recovery, Cisco will be the first to bounce back."
Last quarter, Cisco managed to hurdle analysts' lowered estimates, earning $230 million, or 3 cents a share, on sales of $4.73 billion.