Renewed confidence among telecom and IT original equipment manufacturers (OEMs) as revealed by Cisco Systems’ (CSCO:NDQ) third-quarter results (15 May) bodes well for Spirent Communications (SPT).

As OEM spending recovers the £863 million cap testing and measurements kit supplier could enjoy a sharp rerating. Earnings upgrades over the next couple of months, in the run up to interims to be published in August, could act as the catalyst for a market reappraisal of the counter.

US telecoms equipment supplier Cisco reported 5.4% growth in third-quarter revenues to $12.2 billion and earnings per share up 6.3% to $0.51, beating analyst expectations. This was a robust performance from the bellwether for global IT spend, driven by a strong performance in the Americas and emerging markets.

Revenues were notably strong across several customer types including governmental, commercial and enterprise clients. This recovery suggests the investment purse strings are being gradually loosened by many OEMs after a prolonged spell of belt-tightening.

Spirent plays to several major communications growth themes including super-fast broadband, cyber security and the ongoing upgrade of the mobile wireless network. With regards to the latter Korean electronics giant Samsung (005930:KS) last week (13 May) claimed to have made a breakthrough which lays the foundations for 5G mobile services. This adds another leg to the telecommunication long-term evolution (LTE) story just as 4G gets off the ground.

Based on Investec Securities’ £259.7 million net cash forecast for 2013 and predicted £117 million of earnings before tax, interest, depreciation and amortisation (EBITDA) the company trades on an Enterprise Value/EBITDA ratio of just 9.6. This falls to 8.1 in 2014 when the firm will trade on a lowly cash-adjusted price/earnings multiple of just 12.8.

Shares says: The consensus is bullish and we agree. Buy at 134.9p

SWOT ANALYSIS