Paul, article in Motley Fool on reasons why SG Cowen downgraded Cisco today. In part, Cowen is saying some of the IT (Information Technology) budget money may be getting diverted from capital to Y2K spending:
Potholes in capital budgets could be seen in
the upcoming year as marginal IT disbursements shift from capital
budgets to Y2K spending.
Quite often, the fix that makes the most sense in Y2K problems is to replace the system with newer hardware, rather than try to update the software. This has been speculated for a while to probably cause a "bubble" of hardware sales for, particularly, workstation, server and larger class computer vendors, and their vendors, of course. This would help Intel sales to some degree. Imagine Cisco losing revenue sales to Intel!
Later on in the article, it says that the phenomena is not just "Cisco-centric" and that other IT capital goods companies
took a hit this morning as well, with Dell Computer (Nasdaq:
DELL) down $4 3/8 to $58 5/16, Compaq (NYSE: CPQ) off $2
5/16 to $27 3/8, SAP (NYSE: SAP) falling $2 11/16 to 31 1/16,
PeopleSoft (Nasdaq: PSFT) sliding $3 1/8 to $21 3/16, Oracle
(Nasdaq: ORCL) down $3 1/8 to $22 7/8, and Microsoft
(Nasdaq: MSFT) softening $6 7/8 to $97 1/4.
Well, if the 'just buy new hardware' solution is chosen, rather than fix the software, the Dells and Compaqs (and Intel) should not have been hit.
fool.com
FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Oh No Cisco!
The Nasdaq composite index was crunched
this morning after SG Cowen tweaked its
numbers and changed its rating to a more
cautious stance on data equipment gorilla
Cisco Systems (Nasdaq: CSCO). That sent
Cisco down $8 15/16 to $46 13/16 -- back to
spring levels on unusually high volume (not
counting recent volatility) of 34.2 million
shares at midday. Cowen's 1999 EPS estimate
moves from $1.46 to $1.44 and the 2000
number was reduced from $1.85 to $1.76.
This compares with the current mean 1999
and 2000 EPS estimates of $1.46 and $1.81.
With a very high number of estimates in the
mix and Cowen's former estimates not
skewing the mean, this move signals a
middle-of-the-pack (quantitatively) analyst
setting off an early warning to the market. What looks like value
based on estimates either represents good value or the estimates
are off. That being the case, the market is very sensitive to
indications of changes in the near-term business trend.
Cowen's thesis is based upon its belief that enterprise information
technology budgets are being readjusted for calendar 1999.
Cowen surveyed 22 companies and saw over one-third of the 11
financial services companies responding to its survey changing IT
investment projections, which isn't surprising given job cutbacks
in money center banks and investment-related financial services
companies. Given that these are data-intensive companies and
that 75% of Cisco's revenues come from large customers with
highly complex networking needs, slower sales of less complex
products hurts margins. Cowen also recently published a report
linking 30% of changes in networking industry spending to
changes in developed economy growth rates. With Europe and the
U.S. slowing, Cowen's direct work surveying enterprises and its
channel checks that have shown some pushouts evidence a strong
thesis. In addition to this, Y2K spending was also named as a
possible reason for a change in IT spending, which is another
highly plausible idea. Potholes in capital budgets could be seen in
the upcoming year as marginal IT disbursements shift from capital
budgets to Y2K spending.
In all, this means that Cisco could be affected, and befitting its
bellwether status, the change in outlook moved the rest of the
flock this morning. Ascend Communications (Nasdaq: ASND)
fell $3 5/16 to $36 7/8, a level the stock hasn't seen since the end
of March, and 3Com (Nasdaq: COMS) lost $1 1/2 to $28 5/8 this
morning. Holding with the thesis that this is an IT budget issue
and not a Cisco-centric issue, other IT capital goods companies
took a hit this morning as well, with Dell Computer (Nasdaq:
DELL) down $4 3/8 to $58 5/16, Compaq (NYSE: CPQ) off $2
5/16 to $27 3/8, SAP (NYSE: SAP) falling $2 11/16 to 31 1/16,
PeopleSoft (Nasdaq: PSFT) sliding $3 1/8 to $21 3/16, Oracle
(Nasdaq: ORCL) down $3 1/8 to $22 7/8, and Microsoft
(Nasdaq: MSFT) softening $6 7/8 to $97 1/4. On the positive
side, Cowen did release another note this morning saying carrier
infrastructure spending plans continue to remain unchanged, albeit
with less upside surprise potential. The report did mention
"bullishness" on xDSL potential, which would necessitate
increases in backbone capacity -- a positive for both Cisco and
Ascend. Investors with exposure to these areas should pay
attention to how the market responds to incremental information
and how well the Cowen thesis stress tests in the market of ideas. |
