Is it time to buy Cisco Systems ?
cbs.marketwatch.com
By Chris Kraeuter, CBS.MarketWatch.com
Last Update: 3:01 AM ET Apr 9, 2001
SAN JOSE, Calif. (CBS.MW) -- From Wall Street to Main Street, everybody wants to know: Is it time to buy shares of Cisco Systems?
The 84 percent decline in the stock price in the last year of what was one of the symbols of the bull market of the late 1990s has many investors licking their lips to get back in. But along with the plunge in its shares to the low teens, the company has also seen the erosion of its top and bottom lines.
"It's incredible how low it is, but I won't say it's cheap because an earnings turnaround is a ways away," said John Waterman, chief investment officer for Rittenhouse Financial Services, an $18 billion subsidiary of John Nuveen Co.
"Once you understand the earnings issues, the stock downturn is rational," Waterman said. "It is a rational reaction because not only have earnings slowed, they have evaporated."
Waterman echoed the sentiments of other fund managers and analysts who were reluctant to call a price bottom for the Nasdaq's most active stock, which closed down $1.31 at $13.63 on Friday. However, these same experts also said that Cisco (CSCO: news, msgs, alerts) is a company with a bright future in an important sector.
Nonetheless, you'll still pay a premium for that prospect. David Tice, portfolio manager for the $173 million Prudent Bear Fund, with no positions in Cisco securities, said the stock could fall another 50 to 70 percent from where it's at now.
"We still think Cisco is very expensive," Tice said. "Even though the stock is down a lot, it still sells for 4-times sales and we think it can go lower from here."
He said the networking products maker has seen the best of the largest infrastructure rollout in history and that more money will not be there for Cisco, or its brethren.
"It is a disaster in the networking and infrastructure world, but Wall Street doesn't want to sell."
The entire situation is enough to confound investors so attracted to a bellwether technology stock currently trading at not much more than a Manhattan movie ticket, yet so repulsed by a yet unstoppable dive from an all-time high of $82 last year.
"Is there a lot more room to the downside? I hate to think that, but there may be some at least until Cisco updates investors on what is going on," said analyst Jay Ritter with Morningstar.
So far, the updates have not been encouraging.
Flat feet to stand on
Beginning with Cisco's second-quarter financial report on Feb. 6, when the company missed targets for the first time since July 1994, Cisco said it expected revenue growth to be no better than flat in coming quarters and full-year growth of 40 percent compared with the 50 percent to 60 percent that had been expected. Cisco also trimmed quarterly hiring plans to half of the usual number.
March provided further pain for the company.
On March 9, Cisco said it would cut up to 8,000 employees, consisting of permanent workers and temp workers, through attrition and consolidation. Those cuts would result in a fourth-quarter charge of between $300 million and $400 million. The company declined to give expectations for the third quarter, but that a broader capital spending slowdown could continue through two quarters.
Less than a week later, CEO John Chambers said at an investor conference that customer orders at the start of the quarter were as slow as they were in January, but that he remained comfortable with a 30 percent to 50 percent annual market growth rate.
On March 26, in published reports, Chambers said he expected the downturn in the U.S. economy would last at least three quarters instead of two and that a capital spending slowdown had spread to Asia-Pacific with Europe possibly next.
On April 5, Cisco said it plans to stop making its 15900 Wavelength Router due to slack sales. Cisco said it would redirect its 15900 team to the faster growing metropolitan area network products.
Wall Street could only take so much and analyst downgrades, the trimming of price targets and the cutting of financial estimates followed each announcement. During this period, Cisco's stock fell 56 percent from more than $35.
Looking forward, but not that far
"We're long-term investors, but we're not happy about the decline," Waterman said. "We are surprised by the severity and suddenness in earnings deterioration that we've seen."
Another fund manager, Zack Shafran of the $3.3 billion Waddell & Reed Advisors Science and Technology Fund, said Cisco will emerge from this downturn well positioned in terms of its balance sheet, its technology, and its intellectual capital.
"We are impressed that Cisco is taking aggressive and broad measures to cut costs and better align the organization for the current trend, but also what is likely to be a tougher business climate going forward," he said.
So far, networking industry watchers aren't looking for a rebound in customer capital spending until the end of calendar 2001 or into 2002. That's two more quarters of stagnant or negative growth impacting industry players. Even those estimates, though, are best guesses.
Rittenhouse's Waterman said Cisco will face four more tough quarters financially and that any value buying in the stock won't result in sustainable price rallies.
This is bad news for investors expecting a rise in the stock price to precede improved business conditions.
"The market is forward looking, but looking beyond four quarters is pushing our luck," Waterman said.
A losing proposition
For now, everyone is just trying to find meaningful valuation on Cisco's stock. With financial targets constantly being ratcheted down, the metrics keep changing. Still, people are trying.
Morgan Stanley's Christopher Stix said on March 26 that "fair value" for Cisco's stock could be at $18 to $20. Based on a historical price/earnings ratio relative to the S&P 500, however, the shares would be valued closer to $12 and $13. On an absolute P/E basis, he said the stock is worth $9 to $13, and on a "trough valuation," he pegged the stock at $8 to $10.
"The big question is what is the E for the P," asked analyst Martin Pyykkonen of C.E. Unterberg Towbin, referring to Cisco's projected earnings and its current stock price. "The E tracking the business is very slow, and has come down dramatically in the past quarters to almost a standstill. One of the difficult things for anyone to say with any certainty is to set the E going forward."
"Given all that," Pyykkonen added, "the stock is still reasonably priced for those who can pick some up and hold it for the long term, but that's not a guarantee that there isn't more downside."
Recent action in Cisco options is drawing the same reaction, said Joe Sunderman, manager of research and development at Schaeffer's Investment Research.
During recent weeks, as Cisco's stock has been falling, speculators in the options market have overwhelmingly kept betting that the bottom of Cisco's stock was at hand. Even as the stock kept falling, speculators have kept buying Cisco calls betting that the price of the stock would swing higher.
Sunderman, whose firm believes the opposite of what options traders are doing due to the pure, short-term speculative nature of their bets, said, "This is a losing proposition."
He said a period of consolidation in Cisco's stock will drive the excess optimism away and that the stock could then tick higher after that.
For now, it seems that nothing will move the stock price until something moves Cisco's customers to start spending more money.
"Any sort of positive news about capital expenditures from enterprises or telecoms or the service providers would really have a tremendous effect on the positive performance of the stock," said Sam Olesky of Olesky Capital Management, a $10 million hedge fund.
"But that is a microcosm of the technology market and there has not been a lot of good news out of there recently." |
