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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Bruce Brown who wrote (34909)	11/16/2000 9:09:57 AM
From: Bruce Brown	Read Replies (2) \| Respond to of 54805

No cheerleading intended here, but just a response to some of the glib short term thinking about GMST on this thread of recent. We know that investing is a long term proposition. The market has been fairly ruthless to the likes of Gemstar and Network Appliance this week. Gemstar coverage initiated by Goldman this AM with a buy. They see the stock doubling from the $40's pretty 'easily' or some kind of words to that effect. I see it's climbed back into the $50's in pre-market hours. Pretty wild ride in a few days time - $60 down to $39.50 back to $51. Where will it be 12 months from now? 24 months? 36 months? <ggg> BB

To: Bruce Brown who wrote (34909)	11/17/2000 10:28:11 AM
From: Wyätt Gwyön	Respond to of 54805

Bruce, the continued 'pressure' on Cisco in terms of margins due to the competitive environment for some of their target markets will certainly not be slowing down as we move deeper into this 'next generation(s)' equipment/technology. As Cisco moves into the optical networking space, they are having to play a lot of catchup. They have a well-honed practice of using their expensive stock to make strategic acquisitions, so it is no surprise that they are following this strategy in optics. The difficulty they face is that the cos. they would acquire are very expensive. In a way, they helped create the problem by relying so much on M&A as opposed to in-house R&D, with the result that many cos. with little or no sales can command market caps of billions of dollars. When Cisco bites the bullet and make purchases, there seem to be two drawbacks: * EPS dilution (for example, Grant's has reported that Cisco's YoY EPS in their latest 10-K was actually FLAT when diluted according to Statement of Financial Accounting Standards (SFAS) 123...this is in contrast to Cisco's reported EPS gain of 24%; for those who would say that cash flow is all that matters, I posted earlier that cash flow is becoming increasingly reliant on "tax benefits" while the desirable pillars of strong cash flow--inventories and receivables--are moving in a negative direction; see below, I am reposting this because I think it is important and people are always saying what a cash cow Cisco is) * Risk of poor performance (while the Cerent acquisition has been heralded as a success, there have been questions about other acquisitions, such as Pirelli [c.f. lightreading.com There have been whispers that Pirelli's optical systems business, which Cisco Systems Inc. (Nasdaq: CSCO) bought earlier this year for $2 billion, isn't exactly running like a fine-tuned Italian sports car. "I don't know why they paid that much," said one venture capitialist familiar with the Pirelli technology, asking not to be named. "The accounting was very aggressive and they're having lots of manufacturing problems," said a Wall Street analyst, also asking not to be named. And this, from a former networking executive at a Cisco competitor, who looked at Pirelli's optical business himself: "It was ill-spent money."]) WAR! Whether we take each niche thoroughly apart and examine it to see if we have a specific gorilla game or a specific royalty game going on (I believe we have both - depending on which niche) - it's all about grabbing customers and getting market share at the moment. When that part of the TALC takes place, an investor has to be a little more 'forgiving' for specific fundamental metrics. I call it the "if you snooze, you lose" period. Interesting perspective. I am reminded of the Japanese idea of business being war, and of taking market share at the cost of other metrics. I guess my skepticism relates to the fact that Cisco is already a huge company and is priced pretty much to perfection. I just don't see how the market will cut them more slack. This wouldn't matter if their share price weren't so central to their strategy, but it is. If the stagnation on the earnings front starts to gain more attention, the share price could suffer. This would not only be bad for shareholders; it would also be bad for Cisco's strategy. OK, cash flow again: To: The Phoenix who wrote (41361) From: Mucho Maas Monday, Oct 23, 2000 4:40 PM ET Reply # of 43565 re: Inventory levels and receivables, Looks healthy to me. I'm not so sure. The cash flow statement shows: 2000 1999 Accounts receivable (1043) 45 Inventories (887) (443) -------------------------------------- Adding these together: A/R + Inv (1930) (398) So changes in the operating cycle, and the levels of AR and inventories, resulted in a deduction of (1.93)BB from cash flow in FY00, compared to (.398)BB in FY99. In particular, A/R has gone from a positive item to a billion+ negative item. Meanwhile, among contributions to cash flows, we have: Tax benefits from employee stock option plans 2000 1999 2,495 837 That is, an increase of 1.658BB, or an increase of almost threefold. So the operations-related items--namely inventories and receivables--have worsened, even as the main contributor to the cash flow increase is "tax benefits". Ideally, one would like to see cash flows improving due to operation-related items.