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To: Mike Buckley who wrote (17675)	2/10/2000 6:05:00 PM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

CISCO Valuation It's good to know that I'm not the only person on the planet who questions valuations. The problem is that there might only be two people -- me and the author of the following article. --Mike Buckley ==================== New York, Feb. 10 (Bloomberg) -- Faith, according to Archie Bunker, was accepting something that nobody in his right mind would believe. Faith in the U.S. stock market -- especially in the shares of a select few like Cisco Systems Inc. -- has never been stronger. People must have suspended logic today to buy Cisco at about $136 a share, or 153 times what the company earned per share in its latest 12-month period. That seems beyond the moon even for New Economy investors who have dropped conventional stock- measurement tools from their creed. Cisco's latest market move, triggered by a near-tripling in quarterly profit and plans for a 2-for-1 stock split, pushed it ahead of General Electric Co. as the earth's second-most valuable stock. Cisco is worth $465 billion, GE $444 billion. GE shares, however, trade at 42 times that company's earnings. Perhaps more to the point -- GE after all is an Old Economy stock -- is Microsoft Corp.'s P/E. Bill Gates' computer software company, No. 1 in market value at $547 billion, trades at 66 times earnings. On a P/E basis, investors say Cisco is worth more than twice what Microsoft is. This isn't a knock on Cisco the company. It's the world's biggest maker of routers, switches and software for computer networks. It's earning at an annual rate of $2.6 billion and no company has a better shot at capitalizing on the Internet. Cisco the stock is something else. The faithful would say that Cisco's profits are rising so fast, they will catch up with the share price soon enough. Will they? The company's earnings in the past 12 months were equal to 85 cents a share. If they continued to increase at the 30 percent annual rate of the past five years, per-share earnings would be $3.16 five years from now. Frothy That means investors today are paying 43 times what they expect Cisco to earn half a decade away. At most times in stock market history, a P/E of 43 has been considered frothy. And this assumes the company maintains its current earnings growth rate. Cisco's markets may look limitless, but as the company gets bigger, it will get harder for it to produce the same high percentage gains in profits. And Cisco does have competitors, from a large company like Lucent Technologies Inc. to a newcomer like Juniper Networks Inc. Cisco's ability to grow through acquisitions also may be curbed. Chief Executive John Chambers told Cisco's annual meeting in November that the company would cut its number of takeovers in half if two proposals by accounting rulemakers pass. The Financial Accounting Standards Board wants to ban the ``pooling' method of accounting for takeovers, which allows companies' earnings reports to ignore the high prices paid for acquisitions. FASB also may prevent companies from instantly writing off the costs of unfinished research at acquired companies, a move that can make future profits look good. A decline in takeovers could have an effect on Cisco. The company has said that about 30 percent of its profits have come from acquisitions, as opposed to growth from existing businesses. Right now, however, few of the Cisco faithful seem aware that anything could go wrong with their high-priced company.