WSJ. Networking Stocks Are Mixed After Cisco's Earnings Report [Nice ASND references]
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Shares of data-networking companies were mixed
Wednesday on the heels of the extraordinarily bullish earnings report
released late Tuesday by Cisco Systems.
Analysts were cautious, however, about whether the positive news from
the data networking giant means a rosy outlook for the rest of the players
in the sector.
Wednesday, shares of Cisco jumped 3 5/8 to
close at 96 3/4 on the Nasdaq Stock Market.
Shares of 3Com advanced 9/16 to 24 13/16,
while Ascend Communications slipped 3/4 to
46 15/16, both on Nasdaq, and Newbridge
Networks fell 15/16 to 20 and Cabletron
Systems lost 3/16 to 10 11/16 on the New
York Stock Exchange. Bay Networks, which
has agreed to be acquired by Northern
Telecom, was unchanged at 32 1/2 on the Big
Board.
Meanwhile, the Nasdaq Composite Index
added 2.33 to 1787.97, while Morgan
Stanley's high-tech 35 index gained 4.88 to
578.92.
Late Tuesday, Cisco, based in San Jose, Calif., said that operating
income, which excludes a one-time acquisition-related expense, was $523
million, or 48 cents a share, or one cent higher than the First Call
consensus estimate. Including the charge, net income for its fourth quarter
ended July 25, was $492 million, or 45 cents a diluted share, more than
triple the $151 million, or 14 cents a diluted share, from last year.
Among the more positive elements of Cisco's report, said Paul Johnson, an
analyst at BancAmerica Robertson Stephens, is that Cisco doesn't seem to
be troubled by the pricing pressures plaguing other players in the sector.
"Cisco's unit volume is not that much bigger than the rest of the industry,"
he said, "but the company's exposure to price erosion" is very small.
He estimates that for the rest of the sector, the number of units shipped is
growing at 25% to 30% but companies such as 3Com and Cabletron are
seeing only about 15% to 20% revenue growth. Cisco, however, has been
able to maintain 30% to 49% growth in units and revenue.
One reason for this, Mr. Johnson said, is that Cabletron, 3Com and Bay
haven't been able to differentiate themselves by virtue of quality or
engineering and so have been forced to compete on price.
Problems for the other players also may be compounded by the
economies of scale that Cisco's fast growth brings. "Scale will matter and
Cisco is picking up scale," he said.
Still, he has a "buy" rating on 3Com, because the shares have been so
beaten down of late.
Also, despite Cisco's growing market share there is still room for big
players such as 3Com to carve out big pieces of the rapidly growing
sector.
Chris Stix, an analyst at SG Cowen & Co., said that the networking
companies all did better this quarter and should take some comfort from
the stronger demand they have seen of late.
Also benefiting the whole sector, he said, is the fact that growth in Europe
has made up for slowing revenue out of Asia -- but adds there is some
question about how long that situation will last. He has a "strong buy" rating
on Ascend and a "buy" on 3Com.
Bill Rabin, an analyst at J.P. Morgan
Securities Inc., said Cisco's earnings report
"bodes poorly" for rivals such as Cabletron
and Bay, who compete for business from big
corporations. "In the corporate space it's
over, Cisco's won," he said.
But he added there is still hope for other
networkers -- such as Ascend and
Newbridge -- that are competing to sell
equipment to communications companies,
including Internet-service providers and telecommunications companies.
"In the carrier space it's much more of a jump ball competitively," he said.
Wednesday's Market Activity
Elsewhere in the tech sector Wednesday, Sun Microsystems' options and
stock were trading strongly on speculation that the company is a takeover
target of International Business Machines. Shares of Sun climbed 2 3/8, or
5.2%, to 47 13/16 on Nasdaq, while IBM's shares advanced 1 15/16 to
128 3/4 on the Big Board.
The talk -- about which neither company would comment -- follows the
two firms' unveiling of an operating system for business computers based
on Sun's Java programming language. The rumors originated in the options
market after a major institutional firm executed an enormous buy order for
speculative out-of-the-money calls, traders said. One source, who said the
rumor had definitely put a spark in Sun stock, said he had heard "not to
look for anything until October."
Meanwhile, America Online slipped 3 1/2 to 107 1/2 on the Big Board.
AOL said fiscal fourth-quarter operating income climbed more than
tenfold, surpassing Wall Street's expectations (see article). However, AOL
was forced to delay reporting net income due to problems figuring out the
amount of special charges. The on-line service provider said operating
income reached 23 cents a diluted share, compared with three cents a
share a year earlier. Analysts surveyed by First Call estimated the
company would earn 19 cents a share. Everen Securities cut its rating to
near-term "market performer" from near-term "outperformer."
Electronic Data Systems rose 1 3/4 to 36 3/4 on the Big Board. Standard
& Poor's said it will add the computer-services company to the S&P 500
index after the close of trading Aug. 10. The stock will replace Western
Atlas.
Xilinx rose 1 1/2 to 39 1/8 on Nasdaq. Donaldson Lufkin & Jenrette
upgraded the stock of the chip maker to "top pick" from "buy."
Computer Associates International added 2 to 33 5/8 on the Big Board.
The business software concern acquired Realogic, an international business
and technology consulting concern, in what Computer Associates said was
the first in a series of planned acquisitions.
Lycos slipped 1/8 to 53 3/8 on Nasdaq. In an interview on CNBC, Lycos
Chief Executive Robert Davis said the portal site is "talking to a lot of
folks" about possible alliances.
WRITE to Lisa Bransten at lisa.bransten@news.wsj.com.
Return to top of page | Format for printing
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
|
