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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 78.37

+1.3%

3:59 PM EST

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To: The Phoenix who wrote (35705)	5/18/2000 10:57:00 AM
From: Mr.Fun	Read Replies (2) of 77400

Most institutional investors would be shocked if Cisco could turn in 55% top-line growth without showing sharp increases in receivables. I am amongst those who would be shocked given the tenor of industry scuttlebut. I believe the most likely scenario is a slow deceleration back to 40-45% sales growth. Add to this, operating margin deterioration, and earnings decelerate even more sharply. In this market environment, deceleration is likely to result in multiple contraction. As for multiples, before mid-1998 earnings mattered more than sales. Cisco's earnings growth has been in the high 30's, low 40's. If consensus is a good guide - and for Cisco it has been very good - Cisco will probably do $0.72 in FY01 (1 cent above for each quarter). This is a 33% growth rate vs. expected FY00. Cisco's current P/E of over 100 times CY00 consensus is 3 times earnings growth expectations. This is very high. Over Cisco's history, its P/E was never more than 2 times its earnings growth until 1999. So, if, and this is a big if, investor sentiment is turning away from the "buy Cisco at any price" mentality, you will see a decent to lower multiples - offset by that 33% EPS growth rate. Please note that my comment about a 50-60 multiple of FORWARD EPS is based on historical levels - meaning before 1999. I don't anticipate a huge catalytic event dropping Cisco another $20, but rather a extended period of time where Cisco essentially treads water as its earnings catch up with its price. If the market signals turn go-go bullish again, I'll probably change my mind. BTW I think NT is likely to show further EPS acceleration in 2Q but deceleration thereafter. LU is likely to accelerate all year.

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