A Tough Outlook for Cisco

If investors were looking for signs from Cisco Systems that networking and telecom equipment spending had bottomed, they didn’t get it.

In fact, the company’s conference call last night gave the impression that both the enterprise and service provider businesses are still declining. Cisco said it sees some positive signs that suggest a bottom is possible in the next 1-2 quarters, but the company also warned that its visibility is still very low. CEO John Chambers used the word “challenging” more than 20 times in the conference call, by one count.

Not what investors had hoped to hear when they ran the stock up $1.38 ahead of the earnings report. Cisco was trading down by about that much this morning; that’s about the best news that came out of the earnings report. For the record, Cisco earned 3 cents a share, excluding charges that gave it the first quarterly loss in its history. That was a penny better than expected, but down 78% from a year ago. Revenues fell 4%.

The company still expects revenues in the July quarter to be flat to down 10%. But that’s only if consumer spending in the U.S. does not deteriorate significantly and if CapEx spending in Asia stabilizes.

Chambers reiterated his comment that a decline in business of this magnitude has never been seen in a company of Cisco’s size before. That’s all the more shocking, since Cisco of the 1990s had the best run of any company since IBM in the 1960s.

Cisco is competing with its own second-hand products offered for sale by distressed companies, such as failing dot-coms. The good news there is that our eBay indicator has stabilized at about 2400 Cisco items offered for sale over eBay.

But that’s only a small part of Cisco’s business. Key enterprise markets such as financial services, high-tech and manufacturing have yet to rebound and are still under pressure. And CLECs, long-distance carriers and service providers could be a tough market for the next couple of years, as the more than 400 companies in those areas begin to consolidate.

Chambers continues to claim that Cisco will grow 30-50% a year over the long run, but former company executives and analysts are now saying that 15-20% is more likely. At 53 times July 2002 estimates, that makes Cisco one pricey stock at $19.

The company’s fundamentals could be better than anyone expects if the economy rebounds strongly from the Fed’s rate cuts.

But stocks are like buses, as they say; another one will come along. This one is worth skipping, at least at these levels.

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