8/3/98 SF Chronicle. Sagawa (Bernstein) talks up ASND
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CISCO SYSTEMS/STOCK OF THE WEEK
Peter Sinton
Monday, August 3, 1998
HEADQUARTERS: San Jose
BUSINESS: Cisco is the global leader in
equipment used to link computers in networks. It
helps large corporations, government and
educational institutions connect multiple computer
systems at many locations. It also serves Internet
service providers, cable companies and other
telecommunications carriers as well as small and
medium-sized businesses that need their own data
networks or connections to the Internet.
BACKGROUND: Since becoming a public
company is 1990, Cisco's annual revenues have
increased more than a hundred-fold from $69
million to more than $8 billion. Analysts expect the
company to keep growing at close to 30 percent
during the next five years. Cisco's shares have
doubled since last September. And Fortune
Magazine's current special-investor's issue ranked
Cisco as one of ''10 stocks you can love forever.''
52-week High/Low: $104.50 (7/ 21//98)/$45.42
(10/28/97
Friday's close: $95.75
Chris Stix, analyst, SG Cowen Securities, Boston.
Rating: Strong buy
Cisco leads in most fast-growing data networking
segments. Close to 40 percent of its revenue now
comes from the explosive growth in the LAN (local
area network) switch market. The recent
acquisition of NetSpeed as well as Cisco's
cable-modem initiatives position the company well.
Its recent purchase of Summa Four extends its
capability to move voice messages to data
networks.
Business is strong in North America and Europe
though Asia is likely to be weak. The company is
exceptionally strong on product and sales
execution. Its sales force of about 4,500 is about
50 percent larger than 3Com's.
About 30 percent of revenues come from
communications service providers, which bodes
well for 1999. And AT&T's decision to merge with
TCI has provided Cisco with yet another
opportunity because AT&T has selected Cisco to
provide cable modem equipment for TCI's cable
network.
Cisco also is about to staff up its home-networking
initiative to connect multiple PCs and other devices
in the home and send voice, video and data over
existing home phone lines.
The company will announce its earnings tomorrow.
Our estimate is $517.8 million net income (48 cents
per diluted share) on $2.37 billion in revenue for
the past quarter. Our 12-month target price is
$110, based on Cisco's valuation compared with
other industry leaders such as Microsoft and
Lucent.
Paul Sagawa, analyst, Sanford C. Bernstein & Co.,
N.Y. Rating: Market perform (Neutral)
Cisco has strong management and is a very
aggressive competitor. But I see the company
entering a period where the challenges are greater
than in the past, and the company's stock is likely
to perform in line with the S&P 500 index.
Earnings will be very good (for the past quarter and
year). But 60 percent of revenues come from
routers and other products sold directly to
corporate customers and institutions. This market is
much more price competitive (with companies like
3Com and Bay Networks slashing prices).
This market also is not growing as fast as products
for telecommunications carriers, where gross profit
margins generally are more than 60 percent.
Competitors like Ascend Communications, which is
a pure play in this growth part of the business, sell
for a lower price /earnings multiple than Cisco.
Cisco is getting into a new product category called
layer 3 routing switches, which cost about half as
much as routers but can do many of the same
things. These products have nice profit margins, but
they could cannibalize Cisco's sales of routers.
Also, the convergence of voice and data networks
puts the company on a collision course with Lucent,
Nortel and other telecommunications giants. The
overlap among these companies is small today, but
this could change in five years. Cisco investors
could face an earnings disappointment in the future,
and that could hurt the stock, which is selling at 55
times next year's estimated earnings.
c1998 San Francisco Chronicle Page B2 |
