thestreet.com article on CSCO/networking sector analyst "Ax"
The Ax: J.P. Morgan's Rabin Leads the
Cisco Bulls
By Kevin Petrie
Staff Reporter
5/7/98 6:09 PM ET
Bill Rabin at J.P. Morgan distrusts Wall Street herds,
but the allure of running with the Cisco (CSCO:Nasdaq)
bulls is too strong to resist. In fact, Rabin, Morgan's
computer networking analyst, is leading this pack.
Rabin's work on Cisco has yielded results for his clients.
During three years of buy recommendations the stock has
soared 400%. Sure, Cisco seems an easy pick because
it's the top dog in networking. And it's tough to find an
analyst or money manager who dislikes it.
But at 78 times trailing earnings Cisco is making even
Rabin almost as paranoid as Cisco Chief Executive John
Chambers. Still, Cisco shows few signs of vulnerability. In
the last 12 months, Cisco's broad array of products
generated about 40% of the networking industry's revenue.
Its profit margins are the best in the sector. It claims
two-thirds of the sector's market capitalization.
Why call Rabin an ax? For one thing, he called Cisco's
quarterly earnings report, released Tuesday evening, in
most categories -- namely profits and revenue. In addition,
he urged investors to watch Cisco's book-to-bill ratio,
which came in at greater than 1, signaling future growth.
Overall, Cisco did well during a quarter when corporations
typically slow spending.
As Rabin points out, one rub is that Cisco must win more
business with phone carriers. It also must play the
converging markets of phone and computer systems
wisely.
Yet Cisco showed plenty of bravado in its earnings
conference call, which surprised Rabin. It spoke loudly of
taking market share and growing much more rapidly than
the competition, breaking from its usual diplomacy. Gross
margins grew, rather than eroded as Rabin predicted. But
overall Cisco delivered a pleasantly consistent message.
"I think most of the analysts can give most of the
conference call themselves" says Rabin, whose firm has
done no underwriting for Cisco. He is worried investors will
grow complacent.
"When all of Wall Street tells you to go left, it's time to go
right," he says. Rabin gave that a go last spring, when
investors were panicking in the midst of a technology
swamp. As the stock lost one-third of its value from late
January to late April, detractors whispered that Cisco
would miss its number in the April quarter and fall victim
to the same slowdown as its competitors. (An April 7 Ax
story reported that noted analyst Paul Weinstein, then at
PaineWebber, downgraded the stock to hold in March
1997. Weinstein now is with Deutsche Morgan
Grenfell.)
Rabin ignored the whispers and listened instead to his
sources inside Cisco and its sales channel, and they
assured him revenue was on target. So Rabin says he
"got crazy on it," urging clients to jump while Cisco ran
cheap.
He was right. Cisco's quarterly profits cleared the bar,
helping the entire sector rebound along with the Nasdaq in
early May. Cisco stock has more than doubled since.
Although Rabin didn't single-handedly turn the sector
around, his calls bore the features of an Ax.
Even though everyone is bullish now, it's hard to take the
contrarian stance. Rabin does ply Cisco for weak spots --
for example, he says Lucent (LU:NYSE) will raid the
roost and eventually damage Cisco's gross margins.
Still, that isn't enough to make Rabin tells his hungry
clients to take profits on Cisco. He kicked his 12-month
price target from $73 to $88 per share, which boosts the
price from 30 times estimated earnings to almost 35.
Rabin didn't tinker with estimates immediately after the
call. The analyst says that lofty Lucent, soon to be a big
Cisco rival, makes an apt comparison -- it also trades at
34 times expected earnings and a whopping 226 times
trailing earnings.
Rabin first encountered Cisco as an IT manager with J.P.
Morgan 10 years ago. He purchased routers from Cisco,
then a diminutive private company nobody knew. In 1991,
Rabin entered Morgan's corporate finance training
program, became an analyst the next year and assumed
coverage of the networkers two years later. He has always
recommended Cisco stock.
* * * * *
Among other Cisco analysts, Joe Bellace at Merrill
Lynch added a penny to his estimate for the July 1998
fiscal year, bringing it to $1.75. Gross margins were
higher than he expected. Bellace stuck with his
short-term accumulate and long-term buy ratings, and
said he expects gross margins to slip to 64% in fiscal
1999 from 65.7% today. Cisco "continues to gain market
share," he writes.
Merrill has performed underwriting for Cisco.
George Kelly at Morgan Stanley Dean Witter
headlined a Cisco report with "Here we go Again -- Great
Quarter Higher Price Target." Kelly also pegged the
most-recent quarter's 45 cents per share, and stood pat
with his estimate of 48 cents for the fiscal fourth quarter.
He trimmed his 1999 numbers to $2.18 from $2.19
because of goodwill amortization from last quarter's
acquisitions.
Kelly still calls Cisco a strong buy, and raised his
12-month price target to $90 from $75. He says that in a
year, investors will value the stock at 28 to 30 times
earnings expected for 2000. Institutional Investor ranked
Kelly first on the All-America Research Team for data
networking last year. Morgan Stanley underwrote Cisco's
IPO in early 1990.
Peter Swartz at Salomon Smith Barney reiterated his
buy on Cisco, and lifted the 12-month price target to $85.
Cisco topped Swartz's estimate by one penny and
surprised him with higher gross margins.
Swartz writes that Cisco looks stronger than one year ago
-- it's entering the best season of the year with a better
product line, and customer demand is accelerating.
None of these analysts returned phone calls.
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THE AX
ARCHIVE
Cisco
Company
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Lucent
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