Cisco has bright future but strong competition
Dear Mr. Berko:
In September 2002, when Cisco was selling at $8.25 a share, I wrote and asked you if I should sell the 100 shares I bought in April 2000 at $81.25. You told me to hold the stock. I asked you if I should buy 400 additional shares and you said no.
Well, I kept my original 100 shares and they are now at $19.10. Do you think the stock will return to the $80s so I can break even? If so, do you think that could happen in the next few years? I don’t have much time left; I’m 88 years old now!
Now I’ll ask you again: If you think the stock can move a lot higher, should I buy 400 shares and lower my cost basis? I figured I’d ask you first because if I asked my son or daughter they’d probably say no or tell me to ask you.
R.O., Fort Walton Beach, Fla.
Dear R.O.:
Cisco designs, makes and sells communications equipment and networking products that send data, voice and video around the world or across the street. Cisco Systems Inc. (CSCO-$18.10) is a world-leading supplier of routers, local area network and asynchronous transfer mode switches, dial-up access servers and network management software.
Ten years ago, CSCO’s revenues were $2 billion and earnings were a dime a share. In 2005, revenues should grow to $24.5 billion and earnings are likely to come in at 91 cents a share. Prospects for 2006 are equally as bright, with revenues expected at $27.5 billion and net income coming in at $1.09.
CSCO’s superb operating margins of 35 percent, awesome net profit margins of 35 percent and a 33 percent return on shareholder’s equity are darned impressive numbers. As if that were not attractive enough, the company has zero debt. The company dominates the networking market like Lance Armstrong dominates the Tour de France. Demand should continue to grow, because telecommunications is a key component to increased productivity in developing and emerging economies. CSCO’s new CTS-1 router has Juniper Networks and Avaya on the run and is attracting huge new orders.
During the tech downturn, CSCO wasn’t asleep at the switch. Management wisely used the lull to reduce staff, streamline its operations, move inventory more quickly and improve its manufacturing ability as well as its marketing skills. Meanwhile, management has used its humongous cash flow ($6 billion last year and $7 billion in 2005) to repurchase 1.1 billion shares of stock since 2001.
However, I don’t think you have a snowball’s chance of getting even in the next few years.
Though Cisco may be a shining star in the heavens, there are other suns that shine as bright or even brighter. Cisco has some serious competition in the markets it has targeted for growth. Juniper Networks is a nimble $2 billion revenue competitor and has excellent research and development. Avaya, with $5.6 billion in sales, offers attractive solutions and products, and China’s Hauwei Technologies ($8 billion revenues) has recently won some sizable contracts in CSCO’s coveted overseas markets. Even struggling Nortel Networks, with $10 billion in 2004 revenues, is becoming attractively competitive and has signed several contracts in what used to be Cisco territory.
A lot of folks bought CSCO during the halcyon days of 2000, when it gaily traded in the $80s. But I reckon you’ll have to stay vertical for another 10 years until you break even on the stock. Matthew Albrecht at Value Line likes the stock and thinks the shares could trade at $50 in the next five to six years. Arthur Bensinger at Standard & Poor’s has a strong “buy” rating on the stock and thinks it could rise 50 percent in the coming 12 months. I think CSCO could trade between $25 and $27 in the next 12 months.
And finally, to answer your question: NO, I will not advise you to buy 400 shares of the stock at the current price. At age 88, it would be foolish to take $10,000 from certificates of deposit and speculate. Certainly your son and daughter would give you the same advice. However, it’s your money. You earned it, and you’re entitled to do whatever you want with it. When you wrote me in September 2002, I remember telling you (after you sold your home) that I had “no objections if you used $3,500 from the proceeds to buy 400 shares.” You told me that you were selling your home for $165,000 and had enough income to live on without touching the proceeds from the home sale, all of which was going into CDs. Anyhow, if you did buy 400 shares of CSCO today and sold them at $150 a share the next year, what would you do with all that money?
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.
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