| BUSINESSWEEK ONLINE : SEPTEMBER 13, 1999 ISSUE | ||||||||
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| COVER STORY
Cisco Could Be the Safest Net Play Around Analysts are unanimous in recommending its stock, but it sure isn't cheap Cisco Systems (CSCO) is a stock that's easy to love. For one thing, its share price has more than quadrupled in the past two years, including a nearly 50% rise so far in 1999. Then there are the company's spectacular sales and earnings gains. For its fiscal fourth quarter, ended July 31, it reported 48% sales growth and 38% earnings growth year over year, excluding certain write-offs. For fiscal 1999, Cisco earned $2.55 billion, or 75 cents a share, on $12 billion in revenues. Next year, analysts expect per-share operating earnings of $1.24, according to First Call Corp., which tracks analysts' estimates. To state the obvious, the primary appeal of Cisco to investors is its key role in building the infrastructure of the Internet. Lately, to maintain its stellar growth, Cisco has moved into selling telecom equipment in a bid to build what CEO John Chambers calls the "New World Network," which will blend Internet, cable, wireless, and fiber optic networks . For investors reluctant to bet on volatile, money-losing E-commerce stocks such as Amazon.com (AMZN) or Priceline.com (PCLN), Cisco provides a more comfortable way to get involved in the Net game. "I and my clients don't have the nerve to invest in the more volatile Internet plays," says Hugh Johnson, chief investment strategist at First Albany, which holds Cisco in its managed accounts. In fact, Cisco remains one of Wall Street's most favored stocks. Of the 32 analysts covering the company, 20 rate it a strong buy and 12 rate it a buy, according to First Call. Two analysts upgraded the stock as recently as Sept. 1. SLIM CHANCE OF FAILURE. Not just analysts, but investment strategists and portfolio managers continue to point to it as a core holding. "I have been pushing it literally all year long," says Jack Regan, chief derivatives strategist at Josephthal & Co., who picked Cisco as his stock of the year in January for Business Week's Market Forecast Survey. Cisco's recent multibillion dollar acquisitions of Cerent and Monterey Networks -- plus its $2 billion pact with IBM, which is dropping its own networking products to sell Cisco equipment -- make it more attractive than ever, he says. Indeed, while it is far from a slam-dunk that Cisco will succeed in its new strategy of selling to telecom companies, analysts seem to see little chance that it will fail. Its head-to-head competition against telecom equipment giants such as Lucent Technologies (LU) and Nortel Networks (NT), plus nimble startups such as Juniper Networks (JNPR) and Redback Networks (RBAK), will be fierce. But Cisco "will pull it together," says Gina Sockolow, a high-tech analyst with Brean Murray Securities. Ultimately, the convergence of the Internet and telecom is an opportunity for Cisco, adds Regan, even though she thinks some smaller players will grow faster to become "the next Cisco." Meantime, analysts figure that there's virtually no risk that Cisco could be unseated from its top spot in the data-networking business, say analysts. "They are superb marketers, and their leadership position would be hard to crack," says Chris Stix of SG Cowen Securities. ADJUSTMENT PERIOD? The only nagging question for Cisco is valuation. "That's the main issue when it comes to Cisco and many other top technology stocks," says Johnson. Cisco's current price-earnings ratio is 109, and its multiple on 2000 earnings is 70. "Mind you, it's been high for a while and we've lived with it, thankfully," says Johnson. Still, he thinks the market, which dropped 95 points on Sept. 2, may be moving into a period where, because of modestly higher inflation and interest rates, it will penalize high p-e stocks such as Cisco. He expects this "adjustment period" to be relatively short-lived. "I'm willing to slug my way through a difficult stock-price performance period because I believe Cisco is so well-positioned strategically," he says. For investors who haven't bought Cisco yet, a lull in its stock price could be an opportunity to buy on weakness. But given how long high-tech stocks have been judged as overvalued, Regan thinks investors shouldn't wait to get in. Johnson's advice to investors eyeing Cisco seems to make the most sense: "Buy some now, but don't use all your ammunition." By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS Meet Cisco's Mr. Internet COVER IMAGE: Cisco TABLE: Building John Chambers' New World Network RESUME: John Thomas Chambers PHOTO: John Chambers with Son John on a Fishing Trip TABLE: Cisco's Stock Rockets TABLE: The Tech Industry's Cookie Monster The Man Who Hones Cisco's Cutting Edge ONLINE ORIGINAL: Cisco Could Be the Safest Net Play Around INTERACT E-Mail to Business Week Online | |||
