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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: greg s who wrote (63197)	3/3/2003 10:42:29 AM
From: William F. Wager, Jr.	Read Replies (1) \| Respond to of 77400

Tech Mania Revisited (CSCO) WSJ "Heard on the Street..." Investors Revisit Cisco, A Tech-Mania Symbol By KEN BROWN and SCOTT THURM Staff Reporters of THE WALL STREET JOURNAL Three years ago, when Cisco Systems Inc. was one of the most valuable companies on the planet, worth nearly $500 billion, a Credit Suisse First Boston analyst wrote a report titled: "Cisco -- Potentially The First Trillion Dollar Market Cap Company." It didn't quite turn out that way. Today, Cisco has a market capitalization of $99.4 billion, having been ravaged by a bear market that sent its stock down 80% since the Nasdaq Stock Market's peak three years ago. UPS AND DOWNS • A Party So Wild, Cleanup Goes On But a strange thing has happened to the computer networking company and many other tech stocks during their downward slide: A new group of investors with no illusions of stratospheric growth have bought the shares, buoying them at a time when other stocks are continuing to drop. When the tech flood receded, it left behind two kinds of stocks: the true detritus that clearly were destined for oblivion, and companies like Cisco, which were solid businesses whose only crime was that their shares got insanely expensive during the boom. The former are at best shadows of their former selves, if they are still alive at all. But many members of the latter group are now being valued for their clean balance sheets, ability to generate cash, market share and potential growth rates, modest though they are. So it is no surprise that some of the biggest recent buyers of Cisco shares have been conservative stock mutual funds such as T. Rowe Price Equity Income and Fidelity Growth & Income, who see these survivors without the taint of the dot-com crash. Brian Rogers, who manages the T. Rowe Price fund, said one of the firm's tech analysts approached him in the fall when Cisco shares briefly fell below $10. "He said to me, 'You know, you're interested in bottom fishing as a general trade in your life. Here's a company like Cisco that's down around $8 or $9, it's got no debt, tons of cash, it's buying back stock, and it's the long-term dominant company in its business,' " Mr. Rogers says. "We bought seven million shares." Some investors are hoping that Cisco will part with at least some of its $21 billion in cash and short-term securities by starting to pay a dividend, but many recent buyers, even though they love dividends, say they aren't factoring that into their decision. Buyers like Mr. Rogers are one reason why Cisco, after getting pounded after hitting its $80 peak in March 2000, is actually flat over the past year, a period when the broad market has lost 25%. Tech stocks overall have outperformed the market, albeit slightly, since last May, and are four percentage points ahead of the broad indexes so far this year. "It's very comforting to know that you have the older-school guys really coming back to tech because these were the guys who were antitech prebubble, who never participated," says Christian G. Koch, senior technology analyst at Trusco Capital Management in Atlanta. "You need to wash the people out who lost the money and hate tech now, which I think we've done." Mr. Rogers, 47 years old, has already made 40% on his Cisco investment, and says he plans to hold the stock. "It's probably never going back to $75 in my lifetime, but it never has to do that to be a good investment." Or several lifetimes. During its 99,900% rise during its first 10 years as a public company, Cisco's biggest problem was keeping up with demand for its routers and switches that formed the heart of the Internet. Cisco itself, extrapolating from its earlier growth, predicted even more demand. That is, until demand plunged early in 2001, catching management by surprise and leading to a $2.5 billion inventory write-off. By the numbers, Cisco's transformation has been dramatic. At its peak, the company's price-to-earnings ratio, based on analysts' estimates of its earnings for the next four quarters, was 137, according to Thomson First Call. Today, its P/E for the next four quarters is 23.6, somewhat higher than the ratio for the market overall, which stands at about 17. Back then, analysts believed earnings would grow 30% a year over the next several years; now, the number is 15%, First Call says. Cisco's quarterly revenue is about 30% off its peak level. The company, which briefly became the most valuable in the market, now ranks 21st, right behind Old Economy stalwart Coca-Cola Co. Despite the changed circumstances, many investors still are obsessed with the company. Cisco stock is the second most heavily traded after Microsoft Corp. Cisco is covered by 37 analysts, more than any other company. Those analysts, who almost universally had "strong buys" on the stock at its peak, now are mixed, with 19 "buys" or "outperforms," 16 "holds" and two "underperforms" or "sells." After dipping at the onset of the tech bust, earnings have been a bright spot for Cisco. In its second quarter ended Jan. 25, the company had net income of $991 million, more than it made in any quarter during the boom. Cisco's current profitability, which is largely due to cost cutting, leads many investors to believe that when revenue ticks up again, earnings will jump. But how should investors value companies like Cisco, which during the boom were judged primarily by their ability to generate revenue and grab share? During the bubble, the company was priced for massive growth -- revenue soared 47% a year between 1996 and 2001 while profit rose 31% on average. Now profit, cash flow and a clean balance sheet count as positives, while relatively tepid revenue growth could weigh on the stock. Analysts themselves acknowledge being of two minds on the issue. Gabriel Lowy, at Credit Lyonnais, estimates Cisco's value two ways, one based on revenue and the other on its earnings growth rate. In both cases, Mr. Lowy gives Cisco a premium because of its dominant market position and its ability to cut costs to boost profit during the downturn. But looked at that way, the results aren't encouraging for Cisco bulls. Based on projected revenue of $19.9 billion in the fiscal year ending July 2004, Mr. Lowy thinks Cisco would be valued at $5.54. (The shares rose 23 cents Friday to $13.98.) Based on a projected five-year growth rate of 13% in per-share earnings, Cisco would be valued at $15.44. Averaging the two figures, Mr. Lowy arrives at a "fair value" of $10.50, and recommends that investors sell the stock. Steve Kamman, at CIBC World Markets, suggests investors evaluate Cisco as two separate securities: a stable, cash-generating business valued at about $8 a share, including the roughly $3 a share in cash on Cisco's balance sheet, and an option on the markets that Cisco is trying to crack, such as telecom and connecting storage computers. Success in those newer markets would accelerate Cisco's growth. The value of the option, Mr. Kamman says, would vary depending on investors' estimates of the size of the markets Cisco is trying to dominate, how successful Cisco will be, and with what profit. "Some days it looks like $7. Some days zero," he says. If such an option existed, Mr. Kamman estimates that it would trade for $2 most of the time. All of these calculations assume that sales of tech gear are still artificially depressed by the aftermath of the boom but will rebound eventually. The question is how fast Cisco can boost its revenue, and earnings, once tech sales recover. Cisco executives themselves remain optimistic about the long term. Chief Executive John Chambers no longer talks about annual revenue-growth rates of 30% to 50%, as he did during the boom. But it's not clear that he has lowered his sights very far. Mr. Chambers told analysts in December that he thinks Cisco can increase the revenue in its core businesses by 10% to 20% a year, assuming demand picks up. But Mr. Chambers thinks Cisco can grow faster, by boosting sales to telecom-network operators and penetrating new markets, such as storage, security and carrying telephone calls over computer networks. Most analysts think Mr. Chambers is too optimistic, particularly about prospective growth in Cisco's traditional markets for the switches that connect corporate networks and routers that direct traffic across the Internet. Others are more optimistic. In a note last week, James Parmelee who now covers Cisco for Credit Suisse First Boston but didn't in 2000, said he thinks Cisco can increase earnings at a 15.5% annual rate in a normal tech-buying environment, by penetrating new markets and exploiting "competitor missteps." (CSFB has done recent banking work for Cisco.) That more robust estimate doesn't get Mr. Parmelee very far though. His 12-month price target for Cisco is $17, which would give the company a market cap of just $121 billion. Write to Ken Brown at ken.brown@wsj.com and Scott Thurm at scott.thurm@wsj.com Updated March 3, 2003