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Technology Stocks : Ascend Communications-News Only!!! (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: Narotham Reddy who wrote (569)	11/19/1997 9:36:00 AM
From: Jeff Jordan	Read Replies (1) \| Respond to of 1629

THE ONLINE INVESTOR - Nov 19 9:31am Stock of the Day (Archive) Nov 19, 1997 What Makes This Company So Special As much as we hear and read about Cisco Systems, it isn't like a McDonald's or a Microsoft whose products are readily visible to the average Joe. Few of us have ever held a network hub or a router in our hands. Yet the relatively nebulous nature of its products has not held back Cisco Systems either as a company or a stock, indeed it's a bonafide Hall-of-Famer. So what makes it so special? And what is computer networking, anyway? Furthermore, if the stock is up so much, doesn't that mean it's overvalued? Cisco (Nasdaq:CSCO - news) is the heavyweight champion of computer networking equipment, and computer networking is a huge and fast-growing industry. Just a decade ago computers sat in isolation for the most part, crunching their numbers or playing solitaire (no pun intended). Over the next ten years the urge to connect and share information blossomed, and now practically every computer connects to others in some way, whether through the Internet, on AOL or over a corporate network. That fueled a boom in demand for products like Cisco's, that is equipment which connects computers to a network and transfers the data from one PC across a network to another PC (or mainframe, or server). As new networks are built, as more computers connect to existing networks, and as more data is sent back and forth across all these networks, the need for faster and more efficient networking equipment drives ever-increasing demand for new gear from Cisco and others. And now people want to send not only text and static images across these networks, but streaming video and voice telephony. So it's not as if once everything is networked, there's nothing left to sell. Corporations are continually expanding and upgrading their networks, Internet Service Providers (ISPs) must upgrade their system speed and capacity, and America Online is continually upgrading its system to handle the growing demands of its members. That insatiable demand is reflected in Cisco Systems' corporate performance, which is nothing short of spectacular. In 1987, Cisco had sales of $1.5 million. The next year sales quadrupled to $6 million. This year the company is looking at over $7 billion in revenues -- that's a thousand-fold increase plus a billion dollars to ice the cake. Sales are expected to hit $9.5 billion in 1998. That's the kind of growth you see with a red-hot leader of a red-hot industry. That's what makes Cisco so special. Cisco has simply outdistanced the competition in delivering the cutting-edge technology and end-to-end networking solutions that customers demanded. It's such a rapidly changing field that Cisco can't rest on its laurels and get comfortable, and so far Cisco has made all the right moves to establish and sustain its industry dominance. As with so many other high-tech areas, the explosive growth of computer networking spawned thousands of companies, resulting in a highly competitive environment. Now the industry is in a phase of massive consolidation (mergers and acquisitions) and a big shakeout is widely anticipated. An important distinction about the competition in computer networking is that, unlike other industries such as memory chips, price competition hasn't approached the point where profit margins are sacrificed like lambs to the god of market share. Cisco sustained gross (obscene is more like it) profit margins of 65% this year, and analysts expect those to erode only slightly to 64% or 63% in 1998. Net profit margins are running at 22% (compare that to about 3% for auto maker GM) and those are expected to rise slightly in 1998. Cisco's impressive and sustained profitability is just one more reason Wall Street loves this company. Once a company reaches gigantic proportions it gets hard to sustain rapid growth, but Cisco's deceleration has been fairly modest. It remains nimble and customer-driven despite their mammoth size. To fuel future growth Cisco is pursuing several new markets such as ISPs and telecom carriers. It is particularly focused on products which integrate data and voice communication. It will face heavyweight competition on that front from the telecom equipment side of the universe, as companies like Lucent (NYSE:LU - news) and Nortel also target this growth opportunity. Nonetheless, analysts are clearly betting on Cisco to succeed. They expect earnings per share to grow at an average of 28%-40% over the next five years. That phenomenal performance and consistent ability to live up to lofty expectations is reason enough for analysts to love Cisco. The outperformance of its stock is another. It's up more than 400% in the last 3 years, and something like 11,000% since it came public in the late-eighties. The stock has also weathered recent bouts of market instability rather well. While rivals Ascend (Nasdaq:ASND - news) and now 3Com (Nasdaq:COMS - news) have plunged over 60% amidst the Asian weakness and warnings of earnings disappointments, Cisco is only about 5% off its all-time high. With Cisco's stock price rising so dramatically over the years, it certainly merits investigation as to whether it is overvalued. At 47.6 times trailing twelve month earnings, it probably isn't attracting much fresh buying from value investors. The P/E is a more palatable 28 times estimated 1998 earnings, though, which compares favorably with the average growth rate projection of 30%. Such highly regarded stocks usually don't come cheap, and now we know why Cisco is considered so special.