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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: jach who wrote (17427)	10/6/1998 2:35:00 PM
From: Beltropolis Boy	Read Replies (1) \| Respond to of 77399

great analysis for hitting right-on in regards to the max-pain for CSCO price of 57.5$; FYI, WSJ SMARTMONEY magazine October issue also had it much lower than this (46$) for bad mkt condition. whodathunkit? oxymoron or not, they called it. TIME TO BUY CISCO October 6, 1998 HAS CHRISTMAS arrived early? At a recent $50 a share, networking equipment maker Cisco Systems (CSCO) is now devilishly close to the $46 target price we named in our October magazine feature Dream Stocks at Target Prices. We never expected it would happen so soon. But a few events have conspired to bring Cisco within our reach. Most importantly, over the past two weeks communications equipment makers Northern Telecom (NT) and Alcatel (ALA) announced that they expect to disappoint the Street's expectations in this quarter because of slowing sales to traditional telecommunications customers. Second, on Monday the company confirmed that the FTC had begun an investigation into possible discussions of market manipulation by Cisco and Lucent Technologies (LU). And, finally, some investors fear that Lucent, Cisco's greatest rival, may soon purchase a large Cisco competitor, such as Ascend Communications (ASND). But none of these negatives shakes our belief that Cisco is a dream purchase at $46. That target price is based on the company's expected growth rate over the next two years (30%) as well as the premium at which it has typically traded above the S&P 500 (40%). And we don't believe either of those things is likely to change soon. Cisco's recent fall is in line with that of the entire communications equipment sector, which, according to our Sector Tracking Applet, is off 20% in the past month on fears that demand will slow as companies tighten their capital spending budgets. But there is a big difference between the products sold by Nortel and Alcatel and those sold by Cisco and its competitors 3Com (COMS) and Ascend. Nortel and Alcatel sell older equipment, the stuff that's been powering communications for several decades now. Cisco sells the new stuff, whose demand is mostly Internet-related. These products include routers that direct traffic on the Internet; gigabit speed switches that can increase bandwidth on corporate local area networks strained for capacity by the rise of Internet access; so-called multiservice switches that allow competitive local telephone companies to start offering Internet telephony to customers; and networking devices to feed the explosion in small businesses across the U.S. What's more, Cisco dominates these product categories. According to Dell'Oro Group, a market research firm, it owns 77% of the market for expensive routers that power the networks of Fortune 500 companies and the Internet. And in a few short years it has achieved a commanding position in the market for so-called "wide area" switching equipment that telephone companies are buying to upgrade their own networks. Demand for the networking equipment Cisco sells has increased at a 35% rate over the past five years, more than double the 15.6% growth rate for the old equipment, according to market research firm Dataquest. And there is no sign that demand is about to slow. According to some estimates, Internet traffic is doubling every three months. As Bill Henry, a vice president at Bellcore's Business Consulting unit puts it, there's pressure on capital budgets around the world. But, companies will be less willing to cut spending on data networking equipment than they are on old-style equipment. "The pressure is on everybody, but data [networking] equipment is viewed as the larger growth opportunity" by the telephone carriers, says Henry. That's why Lucent and Nortel and so many other traditional telecom providers are building comparable products or buying networkers outright, as did Nortel when it bought Bay Networks for $7.7 billion earlier this year. There's another reason everybody wants to be in data networking equipment. It is more profitable. Cisco has a gross margin of 65%, compared with 40% for Northern Telecom and 45% for Lucent. And that's another reason why its P/E ratio is so much higher. The company is currently trading at 34.5 times next year's earnings versus 16.9 for Northern Telecom. (Lucent is actually comparable, at 35.8 times forward earnings.) At a price of 46, Cisco would sell at 58.9 times fiscal year 1999 (July) earnings. That is about double its expected earnings growth rate. Could that growth slow? Possibly. If turmoil abroad finally unglues the domestic economy and spoils projects in Asia and Latin America, it is a concern for Cisco as much as any other tech company. But, with such a high growth rate, Cisco can afford to suffer a bit of turmoil. It could even afford to see estimates rolled back a penny or two after the third and fourth quarters of this year. But with its price as low as it is, with its rich reserves of cash on hand (about $3.76 billion in cash and non-cash assets on the books), and with a commanding lead in one of the few sectors of the information technology business whose growth is guaranteed, the effects upon the stock of such turmoil should be limited. That makes Cisco one of the more sensible bets you'll find these days. -- By Tiernan Ray smartmoney.com