5/11/98 briefing.com on Networking Stocks
[Unbelievably lame "analysis." ASND "inventory problem"?
What have they been smoking (not that there's anything with it)?
Why is briefing.com always wrong?
Their inept commentary seems corrupt/unethical. djane]
Networking stocks have put in a mixed performance lately. Cisco (CSCO) and Ascend
(ASND) have been rising steadily, 3COM (COMS) has been trading water, and Bay
(BAY) has fallen back.
Stock Performance
The following charts show that CSCO and ASND have been star performers lately:
CSCO Chart
ASND Chart
COMS Chart
BAY Chart
Wall Street Recommendations
Cisco is clearly Wall Street's favorite of this group, as shown in the following table.
Strong Buy
Moderate Buy
Hold
Moderate Sell
Sell
CSCO
19
13
3
0
0
ASND
11
10
7
1
0
COMS
8
12
14
0
0
BAY
3
9
15
0
0
This strong ranking for CSCO reflects investors strong preference for companies
that have dependable performance. Right now, investors are willing to pay huge
premiums in terms of valuations for companies that are the leaders in their fields, and that
continue to have strong earnings growth. Microsoft and Dell are other examples of this.
Revenue and Profit Problems
In fact, CSCO is the only company in this group that has been able to maintain
strong revenue and earnings growth. All the others have experienced problems.,
REVENUE
Most Recent Quarter
Prev Quarter
Prev 2 Q
Prev 3 Q
CSCO
26.7%
38.9%
36.6%
51.6%
ASND
4.2%
1.6%
8.7%
51.5%
COMS
n/a
n/a
n/a
n/a
BAY
6.7%
25.3%
15.1%
1.4%
All of these companies have experience significant earnings slowdowns, although Cisco not
only remains dominant in terms of size, but is extending that lead.
PROFITS
Most Recent Quarter
Prev Quarter
Prev 2 Q
Prev 3 Q
CSCO
0.43 (+26%)
0.39 (+26%)
0.37 (+42%)
0.35 (+40%)
ASND
0.26 (-16%)
0.24 (-25%)
0.20 (-29%)
0.31 (+41%)
COMS
0.02 (-96%)
0.04 (-93%)
0.48 (-4%)
0.48 (+4%)
BAY
0.04 (-60%)
0.27 (+170%)
0.22 (-12%)
0.14 (-48%)
Ascend and 3Com have had inventory problems, while Bay Network's problems seem to
run deeper, to include a product development cycle that is not hitting on all cylinders.
Valuations
Valuations on all these companies remain high, even relative to this market, in part
because of confidence that long-term demand for these products is virtually assured with
the growth of the Internet and other needs. In fact, optimism now seems to run rampant.
Ascend
The market seems confident that once Ascend works out its inventory problem, that good
times lie ahead. As a result, the stock has nearly doubled this year. This has pushed the
price/earnings ratio (P/E) for this company to an impressive 45, based on earnings
of $1.01 the past four quarter.
This would not be so surprising if earnings were temporarily depressed and expected to
explode. However, the consensus estimate for this year is for growth to just $1.18 a share
and for 1999 to just $1.49 a share. Not bad growth, granted, but that still brings the 1999
P/E down to only 30. Ascend stock now seems to have most of the good news in it;
and while momentum could carry it higher, this is a company that can not
disappoint with earnings any quarter this year, or the stock price is at risk
Bay Networks
Bay Networks trades at 37 times trailing earnings, but that is in part because of the very
low earnings in the most recent quarter. This company is perceived to be under severe
competitive pressures, but for those who believe it can get its act together, it offers
some upside. Earnings were $1.26 a share in 1996, and it is only expected to earn $0.95
in what is basically next year, fiscal 1999 (ended June).
3Com
3Com is also trading at a very high P/E because they basically didn't make any money the
past two quarters. If they get there inventory problems cleared up, prospects improve.
COMS is expected to earn $1.45 next year (FY 1999 ended May 1999), which gives it a
relatively low future P/E of 22. However, COMS has more lower margin products
than some of the other companies, and needs to successfully roll out new products. That
$1.45 is no lay-up.
Cisco
Cisco is king. It trades at 49 times past four quarters earnings, and 35 times next years
(FY 199 ended Jul 99) earnings. Pretty pricey. But the market is willing to pay huge
premiums for leaders in the tech sector, and Cisco looks like it can keep it up for
a while.
Comparisons
Which company is the best bet at this point? In some ways, this is a microcosm of the
whole market. There are huge valuations on market leaders, while companies that have
had earnings hits have rebounded on the belief that earnings will pick up in the second half
of the year.
There is one argument that the big P/E stocks are the most vulnerable in any
correction, but will keep outperforming if the market holds up. Another argument is that
the stocks such as Ascend, where investors seem to have already priced in a strong
rebound, are most vulnerable because earnings might remain stagnant in the second half of
the year. In essence, if nothing changes, these stocks could lose their recent gains.
Briefing believes that forecasting a market correction is always difficult, and that the market
fundamentals remain good. Therefore, betting on the market leaders is hard to argue with.
On the other hand,a strong second half earnings rebound is far from certain,
especially for companies with Asian exposure (there just isn't any economic rebound there
yet). Therefore, stocks such as Ascend that have momentum now will need everything to
fall exactly in place to retain substantial upside. Bay Networks and 3Com are more bets
on product cycles and management than on the financials. They both also need to avoid
disappointments, but Bay has some prospects if its new products exceed expectations.
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