Cisco Systems, Inc. (CSCO)
A technological expert in connections and communication, Cisco Systems (CSCO) provides hardware, software, and service offerings to individuals and businesses of all sizes. The company has maintained a leadership position in the development of internet-based network technologies. But, Cisco has been under the public spotlight recently, as it released its 2nd quarter earnings report before the market opened yesterday.
Cisco’s fiscal year ends in July, so their 2nd quarter ended on January 24, 2009. The company reported a 27% decline in second-quarter earnings from the 2nd quarter the year before. Their net income was $1.5 billion, equating to earnings of 26 cents per share. These numbers beat analysts’ expectations. But this was not the most surprising aspect of Cisco’s earning report. CFO Frank Calderoni stated that the company is expecting a 15% to 20% drop in revenue for the upcoming quarter. This came as a shock to Wall Street analysts that expected 3rd quarter revenue to drop only 3%-7%.
Despite the lowered revenue guidance and decrease in 2nd quarter earnings, CSCO gained 51 cents on Thursday, or 3.22%, and last traded at $16.35. It’s uncommon for a stock to gain on the day of a negative earnings report, so we have to ask why the gain occurred. One possibility is that investors appreciated the fact that the earnings report exceeded analysts’ expectations. But this still leaves the lowered revenue guidance unanswered. A more likely possibility is that investors appreciate Cisco’s strengths.
And there are many strengths. Cisco has an enormous stockpile of $29 billion in cash. The company isn’t just letting the money rest, as it has financed $2.1 billion in their own sales for the last two quarters. While a certain amount of risk goes along with allowing customers to buy on credit, lending has also helped them produce a steady cash flow in harsh economic times. Although they’ve suffered no major harm from defaulted loans, it’s important to note that losses are possible.
It seems that investors also listened the words of CEO John Chambers today. The executive officer stated that cost cutting will “accelerate” in the upcoming quarter. Cisco will attempt to cut $1 billion in costs by managing their discretionary spending. It appears that investors approve of the proactive steps that the company is taking to weather the current economic downturn.
Cisco resides in the technology sector, and many analysts on the Street consider this to be an issue for the company. Their fear of tech may be well warranted, as the sector underperformed market averages from February to September for 17 of the last 18 years. Additionally, tech stocks are very cyclical, they go up when the general market improves and decrease when the markets weaken. We don’t know when the end of the current economic recession will be, so we don’t know when an upturn can be expected for the technology sector.
With all factors considered, I would rate CSCO a conservative buy. The company traded around $24 before the markets fell in late 2008. The stock has lost a third of its price since then, and I don’t think that this drop is completely justified. The company will suffer in the short run as economic conditions will hurt the overall tech sector, but Cisco still rests on solid fundamentals and a strong balance sheet. Cisco is bound to succeed when the markets improve. If the stock pulls back or if the technology sector perks up, I would definitely recommend snatching up the stock.
-Matt Schwartz
College Trillionaire
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