thestreet.com article. JP Morgan analyst says CSCO losing carrier business to ASND
thestreet.com
By Kevin Petrie
Staff Reporter
5/5/98 8:35 AM ET
Early May typically is white-knuckle time for Cisco
(CSCO:Nasdaq) investors, but this time around applause
is building early.
Cisco's stock climbed 1 3/8 Monday to a record high of 74
15/16, as investors bet that the dominant networker will
meet Wall Street's expectations for the April quarter when
it reports after the market closes today, once again
skirting the forces buffeting its rivals. The market values
Cisco at $74.9 billion, or 59 times trailing earnings. On
Monday, Cisco's rising tide was strong enough to pull
other ships higher: Competitor 3Com (COMS:Nasdaq),
whose market cap is $12.1 billion, traded 11/16 higher
Monday to finish at 34 13/16. Ascend (ASND:Nasdaq),
with a market cap of $8.2 billion, lifted 3/8 to 43.
Analyst Bill Rabin at J.P. Morgan says Cisco has
weathered another cruel April quarter. Often corporate
customers pause early in the year to consider how to
spend their annual budgets.
"It's the tightest quarter they have," Rabin says. "This
year they've cheated death once again." He predicts
profits of 45 cents per share, a penny higher than the First
Call consensus estimate. But he doesn't see dazzling
top-line growth. J.P. Morgan hasn't performed any recent
underwriting for Cisco.
Cisco has met official estimates for more than two years.
Its shares, meanwhile, have grown more than 110% in two
years. Through agile management and shrewd
acquisitions, Cisco has gracefully taken care of
technology transitions, consolidation challenges and price
competition that battered its peers. Last quarter, its net
income grew 30% from pro-forma profits a year earlier.
Revenue was up 27%, just below the oft-quoted
industrywide forecast of 30% to 50%. CEO John
Chambers reassured investors in early February that his
view of the long-term industry growth track was intact.
"I think they're going to make their number and maybe
throw in a penny or two for good measure," says one
shareholder who asked not to be named. Cisco often
beats its quarterly revenue goal early, leaving it with
several days of discretionary revenue that can either be
counted in that quarter or saved for the next one. In the
January period, it topped profit and revenue estimates, but
some investors thought it still was able to tuck away
some sales.
The shareholder says Cisco, like Microsoft
(MSFT:Nasdaq), is a master at "gaming" Wall Street. But
the stock is richly valued, and there's little room for Cisco
to stumble.
Rabin, for one, is sniffing for several clues about Cisco's
health in the conference call.
First comes the book-to-bill ratio, a measure of
products ordered to sales billed. A ratio greater than one
means that the backlog shows industry growth. While
Rabin says the measure is more appropriate for other
industries, Chambers, the CEO, likes to give it as one
barometer for networking. Rabin says that in the last two
quarters Chambers stated it was greater than one, while
previously he said it was close to one. Has Cisco kept it
up, while rivals such as Bay Networks (BAY:NYSE) and
Cabletron (CS:NYSE) weaken?
Another hot-button topic: Cisco's progress in selling
data products to phone carriers. Recently Ascend has
crowed about big contracts with GTE (GTE:NYSE), LCI
International (LCI:NYSE) and other carriers, while Cisco
has been reticent. Meanwhile, Cisco has pledged lots of
resources to winning data business with carriers, a
market that Rabin estimates will grow 45% annually.
Cisco also focuses on this market because the company
can use it as a springboard into the converging phone and
computer markets.
Rabin says Cisco needs to strengthen its asynchronous
transfer mode, or ATM, products for carriers. The old BPX
unit is "getting a little bit long in the tooth, and it's starting
to lose business to Ascend," Rabin says.
The pros also will keep an eye on product flow. 3Com
struggled to reduce inventories after acquiring U.S.
Robotics, and Bay Networks is taking longer to collect
bills from customers. How about Cisco? Last quarter,
inventories amounted to 13.3% of revenue, up a hair from
12.9% in the prior period. And day sales outstanding, or
DSOs, which calculate the average time it takes a
customer to pay the bill, clicked up a day to 56. Cisco
isn't expected to stray from these levels.
Cisco must protect gross margins. In the January
quarter, gross margins fattened to 65.4% from 65.1% in
the prior period. The company has long cautioned that
margins will feel pressure; some investors say sales of its
profitable routers are slowing as new switches gain
momentum. And rivals like 3Com are slashing prices on
lower-end switches.
Cisco has eased the pressure partly by selling products
online, thus cutting overhead. In early February,
Chambers said more than 41% of the company's orders
were booked online, marking a significant rise recently.
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