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Tuesday, February 24, 1998
Bellwether No Longer? Cisco Lags Its
Elite Peers
By Lisa R. Goldbaum
Cisco Systems, the dominant company in computer
networking equipment, has certainly been one of the biggest
success stories of the decade. Since its initial public offering in
1990, the stock of the San Jose, CA-based company has soared
over 2,000% as businesses throughout the world set up or
upgraded their computer networks. Cisco has in fact come to be
considered a technology bellwether alongside Microsoft,Intel and
Dell Computer.
And Wall Street continues to love Cisco as well. According to
First Call, the consensus recommendation among industry
analysts covering Cisco is still a Buy, even though the stock is
trading near its all-time high of 66 1/2.
But lately some investors appear to be getting wary of Cisco.
Foster Friess's Brandywine Fund dumped its entire position of
over five million shares in December, according to Vickers Stock
Research. The Fidelity Growth Company fund likewise sold
about 1.8 million shares -- more than half its 3-million-share
holdings -- in November, while Provident Investment Counsel
unloaded about 1.2 million shares out of the approximately 3.2
million it held in December, Vickers' data shows. Both United
Income Fund and Ark Asset Management sold at least half their
Cisco holdings during that time, too.
Selling by company insiders appears to be picking up as well.
This month, vice president Edward Kozel, Cisco's chief
technical officer, filed with the Securities and Exchange
Commission to sell 100,000 shares, while officers Gary
Daichendt and Carl Redfield declared that they would sell about
85,000 and 50,000 shares, respectively, according to Federal
Filings. When asked about these and other intended sales, Cisco
spokesman Bob Michelet said, "As you know, executives have a
narrow window to sell shares, and we encourage them to
broaden their personal portfolios."
Still, some of the recent selling activity may be an early warning
sign that investors no longer put Cisco on quite as high a pedestal
as Dell, Intel and Microsoft. And indeed the stock has lagged its
elite peers during this year's technology rally -- despite
announcing better-than-expected earnings early this month. (The
company reported second-quarter earnings of 43 cents per share,
beating First Call's consensus estimate by a penny.)
Since the beginning of January, Cisco's stock has risen 13% --
ahead of the S&P 500's rise of about 7% in the same period, but
still a far cry from Dell's nearly 53% jump, Intel's 30% advance
and Microsoft's 20% gain. And in 1997, Cisco just matched the
S&P 500's 33% gain, while all the others except Intel (which
was hit particularly hard by the Asian selloff) handily beat that
benchmark.
But though Cisco's gains haven't kept up with the pacesetters,
some think its shares still look overvalued. Even some analysts
who remain ardent fans of the company are growing concerned
about the stock's valuation. Michael Duran, an analyst with
Lazard Freres, downgraded his recommendation on Cisco to
Accumulate from Buy the day after it reported
better-than-expected earnings. "The stock was trading outside
the top end of its five-year trading range," he points out, noting
that it could end up drifting back to within that range. (The stock
traded between roughly 10 and 56 from January 1993 through
the end of 1997.)
And SoundView Financial analyst Michael Karfopoulos, who has
a Buy rating on Cisco's stock, says he "wouldn't be an
aggressive buyer right now" at current price levels, despite the
company's "wonderful fundamentals." And the stock does in fact
look pricey by some measures. At Tuesday's closing price of 64
3/4, Cisco shares change hands at around 30 times First Call's
consensus earnings estimate of $2.14 per share for the fiscal
year ending July 1999, a premium to its expected growth rate of
23% for next year (though about in line with its projected
five-year earnings growth of 30%).
That's one of the reasons Mequon, WI-based asset manager
Reinhart & Mahoney unloaded its Cisco position in December,
according to chief investment officer William Mahoney.
Mahoney said he also had some concerns about Asia's potential
impact on Cisco's business. When the company reported
second-quarter earnings, president and CEO John Chambers
acknowledged some difficulties arising from the Asian crisis,
noting that sales to the region had slipped to 10% of the
company's total sales, from 15% previously. Cisco had $6.4
billion in revenues in the fiscal year ended July 1997.
The rest of Cisco's fundamentals remain sound, as it continues
to gain market share from rivals and branch into newer
businesses, like telecommunications. Demand for networking
equipment has continued to grow nicely as telephone companies
and Internet access providers cope with burgeoning traffic.
Success in these new areas could be essential for Cisco,
however, as revenue growth in the overall networking business
appears to be slowing, according to SoundView's Karfopoulos.
And competition in Cisco's core business will continue to "nip at
its heels," as portfolio manager Mahoney points out.
Another business Cisco is in -- the consumer and small business
market -- is a much more price-competitive market that is set to
become even more so in the years ahead. Even chip-titan Intel
has tossed its hat into the ring, unveiling several new networking
products on Tuesday, including its new Express 8100 router and
Express 130T standalone hub. Intel's expansion is likely to push
down prices and crimp margins in that segment, some analysts
maintain.
All of this means it will be harder and harder for Cisco to stay
well ahead of the pack -- something it will have to do if its stock
is to remain in technology's inner circle.
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