By Lee Jackson
Any way you slice and dice it, the April quarter from Cisco Systems Inc. (NASDAQ: CSCO) was lousy, and investors made the stock pay big time on Thursday, as it closed down over 7%. The deeper question for some on Wall Street and Main Street, especially those who own shares of the companies that do business with Cisco, is what will be the effect on the suppliers’ numbers going forward.
A new RBC report noted that while Cisco’s switching, wireless and security businesses were up nicely, routing, collaboration and the data center silos were all down year over year. In addition, the company’s product orders declined 4% year over year in the quarter, and the forward guidance seems to indicate that the next quarter will be the same.
RBC reviewed the companies it covers with exposure to Cisco, and the report gives investors an idea of how things may stand going forward. We screened for the stocks that are rated Outperform at RBC.
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 noted in its report: “Amphenol has 4% exposure to Cisco, mainly in routers. The company posted solid numbers on the quarter and should be fine.”
Shareholders receive a 0.88% dividend. RBC has a $77 price target, and the Wall Street consensus target is $76.36. The shares closed Thursday at $72.45.
This stock has been on fire over the last year and not only remains a top pick across Wall Street but is also on the Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.
Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. Broadcom has a 5% to 10% exposure to Cisco, mainly in the company’s wired/infrastructure segment, which is 50% of total sales. RBC feels the Cisco results are mostly neutral for Broadcom.
Broadcom investors are paid a 1.3% dividend. RBC has a $250 price target. The consensus price is $250.32, and shares closed Thursday at $237.66.
This stock also is well regarded. 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.
Flextronics does annually between 6% and 8% of sales via switches, routers and infrastructure equipment with Cisco. RBC points out that the Flextronics business with Cisco is more concentrated on the networking giant’s traditional products, which may be declining at a faster rate than other parts of the business.
The $21 RBC price target compares with the consensus target of $18.73. The stock closed Thursday at $16.10.
A smaller cap company, Presidio Inc. (NASDAQ: PSDO) is an information technology (IT) solutions provider. Its services include strategy and consulting, solutions design and deployment, managed services, asset maintenance and support, financing services, global services and carrier connectivity. The company offers various solutions under categories such as Digital Infrastructure, Networking, Collaboration, Enterprise Mobility, Internet of Things and Data Analytics Cloud.
RBC notes that the company does a huge 66% of its vendor business with Cisco, and while it is clearly a headwind, the firm feels that corporate management incorporated that in forward guidance.
The RBC price target for the shares is $18, and the consensus target is $17.75. The stock closed Thursday at $12.95.