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

To: Finder who wrote (28106)	12/17/1997 9:43:00 AM
From: IncredibleHult	Respond to of 61433

Cisco Systems, 3Com Corp, Ascend Communications * * Raising Cisco to Rec. List; Lowering 3Com & Ascend to MO * * Stk Latest 52 Week Mkt Cap YTD Pr Cur Rtg Close Range (mm $) Change Yield --- ------ ------- ------- ------ ----- Cisco Systems, Inc. RL 53.42 61-30 53853.8 26% 0.0% --------------Earnings Per Share--------------- CSCO Oct Jan Apr Jul FY CY 1999 FY 2.17 1998 FY 0.39A 0.42 0.45 0.47 1.73 1.93 1997 FY(A) 0.31 0.34 0.35 0.37 1.37 1.53 -Abs P/E on- -Rel P/E on-- P/NxtFY LT EPS Cur Nxt Cur Nxt EBITDA Growth ----- ----- ----- ----- -------- ------ CSCO FY 30.8X 24.7X 1.5X 1.3X NA X 28% CY 27.6 NM 1.5 NM --------------------------------------------------------------------------- This document also contains comments on COMS, ASND. =========================================================================== * We are raising our rating on Cisco to U.S. Recommended List from market outperformer and lowering our rating on 3Com and Ascend to market outperformer from recommended list. * Upgrading Cisco to the recommended list for the following reasons: 1) Recent correction in response to concerns over growth in Asia, insider selling and an increase in finished goods inventory is overdone; 2) Company is at the early stages of a strong new product cycle; 3) Visibility into January quarter is good as business trends are strong ; 4)Growth in Cisco's market segments in the networking industry while having decelerated remains strong. We estimate that in aggregate the market sectors addressed by the company should grow between 25-40% for the next couple of years. As the leading supplier in most of these segments, the company is well positioned to benefit from this growth. * We continue to expect that both 3Com and Ascend will outperform the market from current valuation levels and highlight that we are not suggesting that either company is likely to disappoint relative to current expectations. However, we are reducing our weighting on the group overall to 'market weighted' from 'moderately overweighted' given the uncertainty surrounding international growth particularly in Asia and the pricing / competitive environment. Therefore, we prefer to emphasize Cisco which has considerably less uncertainty regarding its outlook in 1998. * Our rating changes reflect a higher level of confidence in Cisco the leading company in most of the markets it serves. While 3Com and Ascend are strong in their segments, they do not have quite as strong a position as Cisco. * No change in estimates. For Cisco, our fiscal (July) 1998, 1999 and calendar 1998 estimates are $2.60, $3.25 and $2.90. For 3Com our fiscal (May) 1998,1999 and calendar 1998 estimates are $1.12, $2.05 and $1.55. For Ascend our fiscal (December) 1998 and 1999 estimates are $1.05 and $1.20. =========================================================================== After a year of surprisingly slow growth for the data networking industry in 1997, which we estimate will be about 15%, we expect stronger growth of about 20% for the industry overall in 1998 as the comparisons are a lot easier and the secular trends driving the industry remain intact. Although we expect stronger growth in 1998, the growth rate remains well below the greater than 50% growth that the industry had experienced in each of the six years from 1990 to 1996. While several factors - macroeconomic weakness overseas, slower growth in capital expenditures by Internet Service Providers (ISPs), longer sales cycles from confusion about backbone technologies - lead us to believe that the extent of the slowdown in 1997 was an aberration, other factors - an increasing trend towards ASICs which results in a faster rate of cost / price declines, heightened competition among existing suppliers - indicate that the industry could be transitioning from its rapid growth phase to period of still strong growth which we estimate to be at least in high teens to mid 20s range. A catalyst such as a new market like the Internet or new technology like LAN switches which were significant new opportunities in 1995 and 1996 could meaningfully reaccelerate the overall growth rate. The trend toward integrating voice over packet switched data networks could gain significant momentum later in the year. We discuss these issues in more detail in our upcoming 1998 Issues and Outlook Report. Making broad generalizations about the industry is difficult since fundamentals for specific product sectors and company-specific exposure to these sectors will continue to vary significantly. At the highest level we expect a stronger environment in the service provider segment as compared to the enterprise segment of the market. While the overall growth is likely to improve in 1998, and most stocks already reflect a changing environment, there is enough uncertainty about the growth rate and competitive environment for us to recommend a market weighted position in the group at least to begin the year. Previously, we had recommended a moderately overweighted position. We would consider returning to an overweighted position if international growth is better than expected and appears sustainable for an extended period of time which will most likely reduce competitive pressure in the industry. Given this overall outlook for the sector, we have the highest level of conviction in Cisco since it is the strongest company in almost all the product sectors in which it participates. Additionally, the sectors addressed by Cisco have better fundamentals in terms of growth and competitive dynamics as compared to the industry overall. Therefore, we are raising our rating on Cisco Systems to recommended list from market outperformer. In a more uncertain environment, we prefer to guide investors to the company with the most visibility and best execution despite a higher a valuation. We are also lowering our rating on 3Com and Ascend to market outperformer from recommended list. We continue to expect both Ascend and 3Com to have improving results in 1998 and the stocks to outperform the market from current valuation levels. We highlight that the change in rating is not meant to convey that current holders should sell these stocks, but to express a higher conviction level and better overall fundamentals for Cisco. We highlight the following reasons in support of our upgrade of Cisco: 1. WE EXPECT AT LEAST 32% GROWTH IN CISCO's TARGET MARKET SEGMENTS: Cisco should continue to grow significantly faster than the overall industry which we expect will be up about 20% in 1998. Not only is the company continuing to gain market share but is also focused on product and market sectors that are growing much faster than the industry average. Cisco has no exposure to the adapter card market which we expect will be up only 5% in 1998 and has minimal exposure to the shared hub market which is in secular decline and expected to be down over 15% in 1998. Our expectations are consistent with the company's guidance of 30%-50% growth in its served markets and could prove to be conservative if international markets are stronger than expected.