Tuesday, February 24, 1998
Bellwether No Longer? Cisco Lags Its Elite Peers
By 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.
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 -- more 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.
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.)
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.
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 -- something it will have to do if its stock is to
remain in technology's inner circle.
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