Reassessing Cisco as a Tech Stalwart
nytimes.com
By DANNY HAKIM
Is Cisco Systems still a hot technology company? Or is it a technology company having a midlife crisis?
Maturity is not a concept that excites Wall Street, which craves the heady growth prospects of adolescence. But an earnings warning last month, including the company's declaration that revenue for the current quarter would fall 30 percent and that $2.5 billion of its stockpile of equipment was essentially worthless, has money managers wondering whether the company will ever be able to recapture its sizzle.
This is no small debate. The stock of Cisco, whose main business is making equipment for corporate data networks, is by some measures the second most widely held in the mutual fund industry. It is in more than 1,100 funds, and a change of heart by fund managers would not be good for individual investors.
Anecdotally, some money managers have been tempted to buy Cisco stock after its 75.5 percent decline from its peak 14 months ago. But many are also changing their view of the company from that of cornerstone holding and a sure provider of supergrowth. In short, the merits of Cisco's stock are now debatable.
At least one prominent fund manager, American Century, appears to be taking the bearish side of the debate. In the first quarter, it sold nearly 23 million shares of Cisco, according to regulatory filings, more than half of the company's position. Other fund managers are also rethinking their bets.
"For 10 years, Cisco has arguably been the best-run big company in existence," said Mark Herskovitz, manager of the $2 billion Dreyfus Premier Technology Growth fund. "The question is: Will it ever get back to 30 to 50 percent revenue growth? Has the downturn marked this transition from the Cisco of the last 10 years to a cyclical growth company, like I.B.M.?"
John Chambers, Cisco's chief executive, has said the company can regain its lofty 30 to 50 percent annual pace of revenue growth. Cisco has been expanding its business into equipment for telecommunications networks.
While that could provide future growth, it has also been a double-edged sword, as struggling telecom companies have been canceling orders. The inventory write- down, which appears to have been a result of overproducing equipment during the Internet boom and underestimating the speed of the collapse of demand, essentially wiped out the previous year's earnings.
The market reacted mildly to the warning, mostly because Cisco stock had already fallen so much and many of the problems were anticipated. The shares reached a record high of $80.06 on March 27, 2000, briefly making Cisco the most valuable company on the planet, with a market capitalization of $550 billion. It then plunged as low as $13.63 in early April this year before rallying a bit. The stock is now at $19.64.
Cisco's vicissitudes have reverberated widely, both among Silicon Valley manufacturers that depend on its business and in the fund industry. At this point, it is hard to gauge what fund managers as a group are doing. An end-of-March report by Morningstar Inc. on fund holdings showed Cisco at No. 2, behind General Electric, in total fund assets invested. But the data is taken from regulatory filings that are often months out of date.
"I bet that's not the case anymore," said Anthony R. Sellitto III, manager of the $250 million Putnam Balanced fund. "I bet Pfizer has taken on that role, behind G.E., and maybe Microsoft is third."
Cisco is in the middle of the Putnam fund's portfolio. Mr. Sellitto said he had reduced the position over the last year but had taken a more bullish stance of late.
"It's not a screaming buy, but it's relatively attractive," he said. "I would say it's going to have between a high-teens and mid- 20's growth" in revenue.
"It's going to be hard to do anything above 25 percent," he added, "because of the laws of large numbers."
For Mr. Herskovitz of Dreyfus, Cisco was a top holding a few years ago. But by the end of last year, he had sold it completely. Since the profit warning last month, he has bought a little back.
Mr. Herskovitz, who usually buys stocks that he expects to hold for three to five years, is positive on Cisco, which he calls a "special situation" for the short term. But he indicated that he would take a wait-and- see approach over the longer term.
Cisco was in the top half of holdings, by value, in the $900 million Northern Technology fund at the end of the first quarter. But John Leo, the fund's co- manager, is having second thoughts.
"We have not been selling the stock in this rally, but we're talking about what a reasonable objective might be in the near term," he said. That means he is waiting for the stock to go higher before he thinks about selling it.
"Cisco, being a tech bellwether, is probably going to be treated in the market similarly to the broad tech averages," he said. "That means it will trade down when news flow is poor and sentiment suffers. We expect some ups and downs in the market's appetite for tech stocks between now and late summer."
Mr. Leo said that "people are pretty skeptical" that Cisco can return to 30 to 50 percent revenue growth, as Mr. Chambers has predicted.
One hedge fund manager, who spoke on condition of anonymity, said Cisco's warning did not look so bad next to the struggles of competitors like Nortel Networks and Lucent Technologies. And though putting a value on Cisco is still challenging, the manager said, the company's revenue is likely to grow 20 to 30 percent a year, a healthy- enough pace, when it emerges from its funk.
"We're spending a lot of time figuring out where the bottom is," the manager said. "We're not going to miss it when the market turns."
One manager who is quite bearish is Peter Doyle, chief investment officer of Kinetics Asset Management, which runs one of the oldest Internet-specific mutual funds. "They operate in an industry that's in incredible flux," said Mr. Doyle, who does not own Cisco. "You're looking at a company with a $130 billion market cap and there's not a lot of earnings visibility. It's speculation more than investing." |
