This is from briefing.com:
I post this because I want those investors with true insight, and vision to see that there is no mention of CS in the entire article. This is evidence that CS is out of the market favor, for now, and is lacking popularity. As the masses flock to these other networkers, and pay the premium prices, we will be patient and be rewarded for not "going with the flow". Sometimes its just that siimple.
Updated 11-May-98
Networking Stocks
Networking stocks have put in a mixed performance lately. Cisco (CSCO) and Ascend (ASND) have been rising steadily, 3COM (COMS) has been treading water, and Bay (BAY) has fallen back.
Stock Performance
The following charts show that CSCO and ASND have been star performers lately:
CSCO Chart
ASND Chart
COMS Chart
BAY Chart
Wall Street Recommendations
Cisco is clearly Wall Street's favorite of this group, as shown in the following table.
Strong Buy Moderate Buy Hold Moderate Sell Sell
CSCO 19 13 3 0 0
ASND 11 10 7 1 0
COMS 8 12 14 0 0
BAY 3 9 15 0 0
This strong ranking for CSCO reflects investors' strong preference for companies that have dependable performance. Right now, investors are willing to pay huge premiums in terms of valuations for companies that are the leaders in their fields, and that continue to have strong earnings growth. Microsoft and Dell are other examples of this.
Revenue and Profit Problems
In fact, CSCO is the only company in this group that has been able to maintain strong revenue and earnings growth. All the others have experienced problems.,
REVENUE Most Recent Qtr Prev Qtr Prev 2 Q Prev 3 Q
CSCO 26.7% 38.9% 36.6% 51.6%
ASND 4.2% 1.6% 8.7% 51.5%
COMS n/a n/a n/a n/a
BAY 6.7% 25.3% 15.1% 1.4%
All of these companies have experience significant earnings slowdowns, although Cisco not only remains dominant in terms of size, but is extending that lead.
PROFITS Most Recent Qtr Prev Qtr Prev 2 Q Prev 3 Q
CSCO 0.43 (+26%) 0.39 (+26%) 0.37 (+42%) 0.35 (+40%)
ASND 0.26 (-16%) 0.24 (-25%) 0.20 (-29%) 0.31 (+41%)
COMS 0.02 (-96%) 0.04 (-93%) 0.48 (-4%) 0.48 (+4%)
BAY 0.04 (-60%) 0.27 (+170%) 0.22 (-12%) 0.14 (-48%)
3Com had inventory problems related to its US Robotics acquisition. Ascend experienced several problems, including a delayed product transition (Max TNT) and significant exposure to Asia. Bay Network's problems seem to run deeper still, to include a product development cycle that is not hitting on all cylinders.
Valuations
Valuations on all these companies remain high, even relative to this market, in part because of confidence that long-term demand for these products is virtually assured with the growth of the Internet and other needs. In fact, optimism now seems to run rampant.
Ascend
The market seems confident that once Ascend works out its inventory problem, that good times lie ahead. As a result, the stock has nearly doubled this year. This has pushed the price/earnings ratio (P/E) for this company to an impressive 45, based on earnings of $1.01 the past four quarter.
This would not be so surprising if earnings were temporarily depressed and expected to explode. However, the consensus estimate for this year is for growth to just $1.18 a share and for 1999 to just $1.49 a share. Not bad growth, granted, but that still brings the 1999 P/E down to only 30. Ascend stock now seems to have most of the good news in it; and while momentum could carry it higher, this is a company that cannot disappoint with earnings any quarter this year, or the stock price is at risk
Bay Networks
Bay Networks trades at 37 times trailing earnings, but that is in part because of the very low earnings in the most recent quarter. This company is perceived to be under severe competitive pressures, but for those who believe it can get its act together, it offers some upside. Earnings were $1.26 a share in 1996, and it is only expected to earn $0.95 in what is basically next year, fiscal 1999 (ended June).
3Com
3Com is also trading at a very high P/E because they basically didn't make any money the past two quarters. If they get their inventory problems cleared up, prospects improve. COMS is expected to earn $1.45 next year (FY 1999 ended May 1999), which gives it a relatively low future P/E of 22. However, COMS has more lower margin products than some of the other companies, and needs to successfully roll out new products. That $1.45 is no lay-up.
Cisco
Cisco is king. It trades at 49 times past four quarters earnings, and 35 times next year's (FY 199 ended Jul 99) earnings. Pretty pricey. But the market is willing to pay huge premiums for leaders in the tech sector, and Cisco looks like it can keep it up.
Comparisons
Which company is the best bet at this point? In some ways, this is a microcosm of the whole market. There are huge valuations on market leaders, while companies that have had earnings hits have rebounded on the belief that earnings will pick up in the second half of the year.
There is one argument that the big P/E stocks are the most vulnerable in any correction, but will keep outperforming if the market holds up. Another argument is that the stocks such as Ascend, where investors seem to have already priced in a strong rebound, are most vulnerable because earnings might remain stagnant in the second half of the year. In essence, if nothing changes, these stocks could lose their recent gains.
Briefing believes that forecasting a market correction is always difficult, and that the market fundamentals remain good. Therefore, betting on the market leaders is hard to argue with. On the other hand,a strong second half earnings rebound is far from certain, especially for companies with Asian exposure (there just isn't any economic rebound there yet). Therefore, stocks such as Ascend that have momentum now will need everything to fall exactly in place to retain substantial upside. Bay Networks and 3Com are more bets on product cycles and management than on the financials. They both also need to avoid disappointments, but Bay has decent prospects if its new products exceed expectations
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