of interest
Weekday Trader
Bellwether No Longer? Cisco Lags Its Elite Peers
Lisa R. Goldbaum
Cisco Systems, the dominant company in computer networking equipment, has
certainly been one of the biggest success stories of the decade. Since its
initial public offering in 1990, the stock of the San Jose, CA-based
company has soared over 2,000% as businesses throughout the world set up or
upgraded their computer networks. Cisco has in fact come to be considered a
technology bellwether alongside Microsoft, Intel and Dell Computer.=20
And Wall Street continues to love Cisco as well. According to First Call,
the consensus recommendation among industry analysts covering Cisco is
still a Buy, even though the stock is trading near its all-time high of 66
1/2.
But lately some investors appear to be getting wary of Cisco. Foster
Friess's Brandywine Fund dumped its entire position of over five million
shares in December, according to Vickers Stock Research. The Fidelity
Growth Company fund likewise sold about 1.8 million shares=97more than half
its 3-million-share holdings--in November, while Provident Investment
Counsel unloaded about 1.2 million shares out of the approximately 3.2
million it held in December, Vickers' data shows. Both United Income Fund
and Ark Asset Management sold at least half their Cisco holdings during
that time, too.
Selling by company insiders appears to be picking up as well. This month,
vice president Edward Kozel, Cisco's chief technical officer, filed with
the Securities and Exchange Commission to sell 100,000 shares, while
officers Gary Daichendt and Carl Redfield declared that they would sell
about 85,000 and 50,000 shares, respectively, according to Federal Filings.
When asked about these and other intended sales, Cisco spokesman Bob
Michelet said, "As you know, executives have a narrow window to sell
shares, and we encourage them to broaden their personal portfolios."
Still, some of the recent selling activity may be an early warning sign
that investors no longer put Cisco on quite as high a pedestal as Dell,
Intel and Microsoft. And indeed the stock has lagged its elite peers during
this year's technology rally--despite announcing better-than-expected
earnings early this month. (The company reported second-quarter earnings of
43 cents per share, beating First Call's consensus estimate by a penny.)
Since the beginning of January, Cisco's stock has risen 13%--ahead of the
S&P 500's rise of about 7% in the same period, but still a far cry from
Dell's nearly 53% jump, Intel's 30% advance and Microsoft's 20% gain. And
in 1997, Cisco just matched the S&P 500's 33% gain, while all the others
except Intel (which was hit particularly hard by the Asian selloff) handily
beat that benchmark.=20
But though Cisco's gains haven't kept up with the pacesetters, some think
its shares still look overvalued. Even some analysts who remain ardent fans
of the company are growing concerned about the stock's valuation. Michael
Duran, an analyst with Lazard Freres, downgraded his recommendation on
Cisco to Accumulate from Buy the day after it reported better-than-expected
earnings. "The stock was trading outside the top end of its five-year
trading range," he points out, noting that it could end up drifting back to
within that range. (The stock traded between roughly 10 and 56 from January
1993 through the end of 1997.)=20
And SoundView Financial analyst Michael Karfopoulos, who has a Buy rating
on Cisco's stock, says he "wouldn't be an aggressive buyer right now" at
current price levels, despite the company's "wonderful fundamentals." And
the stock does in fact look pricey by some measures. At Tuesday's closing
price of 64 3/4, Cisco shares change hands at around 30 times First Call's
consensus earnings estimate of $2.14 per share for the fiscal year ending
July 1999, a premium to its expected growth rate of 23% for next year
(though about in line with its projected five-year earnings growth of 30%).
That's one of the reasons Mequon, WI-based asset manager Reinhart & Mahoney
unloaded its Cisco position in December, according to chief investment
officer William Mahoney. Mahoney said he also had some concerns about
Asia's potential impact on Cisco's business. When the company reported
second-quarter earnings, president and CEO John Chambers acknowledged
some difficulties arising from the Asian crisis, noting that sales to the
region had slipped to 10% of the company's total sales, from 15%
previously. Cisco had $6.4 billion in revenues in the fiscal year ended
July 1997.
The rest of Cisco's fundamentals remain sound, as it continues to gain
market share from rivals and branch into newer businesses, like
telecommunications. Demand for networking equipment has continued to grow
nicely as telephone companies and Internet access providers cope with
burgeoning traffic.
Success in these new areas could be essential for Cisco, however, as
revenue growth in the overall networking business appears to be slowing,
according to SoundView's Karfopoulos. And competition in Cisco's core
business will continue to "nip at its heels," as portfolio manager Mahoney
points out.=20
Another business Cisco is in--the consumer and small business market--is a
much more price-competitive market that is set to become even more so in
the years ahead. Even chip-titan Intel has tossed its hat into the ring,
unveiling several new networking products on Tuesday, including its new
Express 8100 router and Express 130T standalone hub. Intel's expansion is
likely to push down prices and crimp margins in that segment, some analysts
maintain.
All of this means it will be harder and harder for Cisco to stay well ahead
of the pack=97something it will have to do if its stock is to remain in
technology's inner circle. =20 |
