SmartMoney.com
April 17, 2001
WAS IT bad news, or not so bad news?
Wall Street seemed confounded today about the implications of last night night's big earnings warning from the Internet infrastructure leader Cisco Systems (CSCO).
Stocks opened, as might be expected, in a nosedive, considering Cisco's large size and bellwether status in the tech world. However, it soon became apparent that most selling had washed out in the premarket, and soon, investors went bargain hunting. Eventually, that petered out too.
At 2 p.m. ET, the Nasdaq Composite Index was up five. It had been as much as 40 down and 32 up. Likewise, the Dow Jones Industrial Average, which swung between an 83-point drop and a 60-point climb, was off 25. The S&P 500 gained four. Tech stocks were mixed, as buyers did much of their work among defensive energy, utility and health-care stocks.
Cisco, the world's largest maker of equipment for running Web sites and corporate computer networks, reported last night that it expects earnings per share for the quarter ending in April in the "very low single-digit range," compared with analysts' expectations of eight cents.
The company expects revenue to fall 30% from the previous quarter, and decline slightly from the $4.92 billion posted in the year-ago period. Cisco increased its planned job cuts by 500 to 8,500, and said it would write off $2.5 billion of inventory.
Chief Executive John Chambers has been sounding the alarm for months that Cisco's business is the worst he has ever seen. And while last night marked the first time he specifically spoke about weak profits, Wall Street analysts had anticipated such a warning.
Chambers explained that the economic slowdown is so severe that it hit like a flood that occurs once every 100 years. This has caused telecommunications companies and corporations around the country to drastically cut spending, leaving Cisco with massive amounts of excess parts and finished products.
"This may be the fastest any industry our size has ever decelerated," Chambers said, but added that he expects the company to resume its former growth rate of 30% to 50% a year at some point.
The shares tumbled 9%, then recovered, somewhat, to a 4% decline to $16.51.
So what does it mean when one of the most widely-held high-fliers of the technology sector releases a shockingly severe warning and the market muddles around?
Some think it's Cisco specific and that competitors might profit from this situation. Others said that Cisco and its networking sisters have been hit so hard, there's no place to go but up -- eventually.
Salomon Smith Barney's Alexander Henderson called the announcement "the last hurrah of truly ugly news" for the sector. "We think it will take some time to heal these wounds and to build a base, but we think it's now safe to start to build positions again."
While Cisco remained weak, its smaller competitors rose. Ciena (CIEN) gained 4% and Juniper Networks (JNPR) picked up 3%.
Makers of the communications semiconductors that Cisco buys had a topsy-turvy day. Initially, traders interpreted Cisco's decision to write off inventories as good news. As this theory goes, the writeoff means Cisco will ditch many of the chips it has already bought -- fearing they will become obsolete by the time it can use them -- and it will need to buy newer-generation chips.
However, analysts at Merrill Lynch and Lehman Brothers threw water on that scenario. They said Cisco can still use the chips it is writing off over time for a variety of different purposes.
So chip makers that had been higher, made a U-turn. PMC-Sierra (PMCS) slid 2%, but Broadcom (BRCM) lost 9%.
Barry Hyman, chief investment strategist for asset manager Ehrenkrantz King Nussbaum, said some investors feel that weak tech profits are already built into the market and so are buying now. However, he cautioned that until Cisco and others fully recover from the downturn, stock gains may be fleeting.
"We’re getting through one problem, which is the inventory correction," he said. "At the same time, the question is, 'What is the demand?' And that certainly will be different than we’ve seen in the past two years." (That is — it will be lower.)
Elsewhere earnings reports were pushing the Dow industrials around. Eastman Kodak (EK) was the average's biggest drag, falling 5% to $41.11. Its first-quarter profit of 54 cents a share beat analysts' estimates by three cents, but was a 43% drop from last year. In addition, the company withdrew its profit guidance for 2001 and said it will cut nearly 3,500 jobs.
On the other side of the Dow, Johnson & Johnson (JNJ) gained 1% to $93.91. It posted a 14% profit surge to $1.06 a share on strong sales of drugs and medical devices, and beat the Street by two cents a share.
Economic data proved a nonevent. The March consumer price index came in precisely as expected, up 0.1%. Housing starts fell 1.3% to an annually adjusted rate of 1.61 million, slightly less than the 1.63 million forecast.
Bond prices rose, sending yields lower. The 10-year Treasury note yield skidded to 5.20% from 5.27% late yesterday. The 30-year bond yield fell to 5.65%, compared with 5.69% yesterday. |
