The Crisco kid: This is what Robbie stephens now says about it...
Cisco Systems, Inc.
NASDAQ: CSCO $18.13
Market Performer
F2001E EPS: $0.50, down from $0.59
F2002E EPS: $0.27, down from $0.55
Paul Johnson, Communications/Networking
“On the morning of March 26, 2001, the Financial Times published excerpts from an interview with Cisco CEO John Chambers indicating a more negative outlook than previously believed,” said Johnson. “As Cisco is now conducting its investor relations program through the press, we have interpreted these comments as a second pre-announcement by Cisco. We are cutting our estimates substantially to reflect the change in outlook and the increasingly competitive environment in which Cisco operates. One innovative interpretation of relative valuation suggests that investors seem to be expecting similar growth from Cisco to that of its key profitable competitors who, in our opinion, continue to actively take market share from Cisco and have greater visibility into future growth. Looking at the economics of the businesses represented below, the competitive advantage period for the competitors appears to be lengthening, while that same metric for Cisco seems to be shortening every day – implying a lower growth potential for Cisco. We do not believe this shift in competitive advantage is reflected in Cisco’s current valuation. The valuation in 1999 and 2000 indicates that investors held significantly higher expectations in terms of future earnings growth for Cisco than in previous years – reaching its peak in the first calendar quarter of 2000. In the past three quarters, Cisco’s valuation has decreased steadily in relation to annualized earnings and appears to be falling back to the prior valuation levels of below 40x earnings. We believe that this reduction has been driven by overall stock market trends as well as Cisco’s deteriorating competitive position, return on capital, and demand visibility. Interestingly, Cisco has never before seen this combination of poor economic outlook and loss of competitive advantage / market share – exemplified by the first ever negative sequential earnings growth forecast in the company’s history. In light of these developments, we feel that Cisco’s valuations may see valuation levels approaching the 20x earnings level of the 1990s. We are maintaining our Market Performer rating. Although Cisco's lowered stock price is seductive to investors, we believe that there may be still a significant near to intermediate term downside to the stock.” |
