This pretty well sums it up. Execution is what it's about and Cisco has performed well. Even this doubter has been given reason to rethink his position. I bolded a few interesting points. One bolded area deals with other tech leaders, that they have the same forward multiple as Cisco. If so, where do you put your money given Cisco's near flawless historical execution and clean books (not my words - Pat Dorsey's).? Other gems are "financial conservatism", execution in service provider markets. When I read this story (from a recent bear like Pat) I wonder who has it right... Pat.... or Bambs? LOL!
Morningstar.com
The Cisco Apologia
By Pat Dorsey
So, it seems I was wrong, sort of, about Cisco (Nasdaq: CSCO - news).
Although all of the potential long-term concerns that I detailed back in early May about the company still hold true, it
looks like I underestimated two things: the speed with which Cisco has been able to win new customers in the crucial
service provider--or communications carrier--market, and the willingness of Wall Street to continue to pay sky-high
valuations for leading tech companies.
As for the former, all kudos to John Chambers. Cisco's expansion into the service provider market is going much more smoothly than I would have
thought, and I doubt that the departure of Don Listwin--who used to head up that line of business and will now be CEO of the merged Phone.com
(Nasdaq: PHCM - news) and Software.com (Nasdaq: SWCM - news)-- will cause Cisco to skip a beat. Moreover, the company has managed to grow
while maintaining the tight financial discipline for which it is justly famed. As for the latter, it seems that the rest of the market has just caught up to
Cisco, and other tech leaders like Nortel (NYSE: NT - news), EMC (NYSE: EMC - news), and Sun Microsystems (Nasdaq: SUNW - news) are currently
valued at about the same price/earnings multiple based on calendar 2001 estimates.
In any case, Cisco still isn't a slam-dunk investment. The company's return on invested capital will likely decline as it increases its use of vendor
financing, and the accelerated shrinkage of gross margins means the company will need faster sales growth just to maintain its earnings-growth rate.
Moreover, a slowdown in capital spending among service providers--of which there is some evidence to indicate is on the horizon--would crimp the
company's market expansion. Most importantly, the stock's valuation still leaves zero room for error, despite being in line with other mega-cap tech
stocks.
With these warnings in mind, however, it looks like Cisco has as good a chance as any of the tech leaders--and probably a better chance than most--of
exceeding the extremely high expectations that have been placed on it. It's still an expensive and risky stock, but the business risks that gave me pause a
few months ago are now less of a concern. Demand for networking gear is so strong that even Cisco's gargantuan top line should be able to continue to
grow at a respectable rate, and the company's financial conservatism should mitigate the impact of increased vendor financing. |
