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Cisco the super hero?
Solid earnings from the networking giant could rejuvenate the market. Can CEO John Chambers deliver?
August 9, 2004: 2:42 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Wall Street is holding out for a hero. And as Bonnie Tyler sang in "Footloose" -- "He's gotta be sure. And it's gotta be soon. And he's gotta be larger than life."

Investors are hoping that this hero will be John Chambers, CEO of Cisco Systems, scheduled to report its fiscal fourth quarter results after the market close on Tuesday.

Tech stocks have been mercilessly thumped since the beginning of July -- the Nasdaq is down 13 percent -- even though results and guidance were fairly strong.

A solid report from Cisco, which is widely viewed as one of the top barometers of corporate technology spending, could help to finally turn Wall Street's frown upside down.

"With a good performance and at least some encouraging tones from Chambers, we could get a change of mood on the Street," said Michael Davies, an analyst with Investec. "It's desperately needed. It's time we focus on fundamentals."

Still, how strong will Cisco's numbers have to be to excite Wall Street? Analysts expect the company to report earnings, excluding charges, of 20 cents a share, up from 15 cents a year ago. But for the past two quarters, Cisco has beat earnings estimates by a penny. And three quarters ago, Cisco came in two cents ahead of estimates.

So Cisco will probably need to at least deal blackjack, hitting 21 cents per share, to satisfy investors.

Lucky sixes for Cisco?

Wall Street will be hoping for a positive surprise on the sales side as well. The consensus revenue estimate is $5.89 billion. But unless Cisco's sales number starts with a 6, the market would likely be disappointed.

"Cisco can come in above the high end on sales. The U.S. enterprise market appears to be picking up," said Ken Muth, an analyst with Robert W. Baird. "I do think Cisco can report something with a 6 in front of it."

Cisco, like many other tech stocks, has swooned during the past few months.  
Cisco, like many other tech stocks, has swooned during the past few months.

For Cisco to do that, however, it will probably need to have had better than expected results from several relatively new product areas to compensate for what is now sluggish growth in the company's core business of selling switches and routers. The new areas to watch for include security, voice over Internet protocol, and wireless.

"There has been a modest pickup in spending but it's still pretty tough out there," said William Becklean, an analyst with Oppenheimer. "It's definitely growth initiatives that are driving sales since the switch and router market is pretty tepid."

Sales guidance for the fiscal first quarter of 2005 (and possibly beyond that if Chambers decides to outline full year 2005 projections) will also be key. The market is concerned about whether corporate demand for Cisco's networking gear will hold up.

And since Cisco reported a more than 20 percent jump in inventories in its fiscal third quarter, there will be increased pressure on Cisco to prove that demand is not cooling.

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Cisco is expected to report a 2 percent sequential increase in sales in the fiscal first quarter, to $6.02 billion. For the full year, analysts expect sales of $25.2 billion, a 14.5 percent increase from fiscal 2004. The consensus earnings forecasts are for 20 cents a share in the first quarter and 86 cents for fiscal 2005. The company doesn't usually comment about earnings, though.

If Cisco gives sales targets that are higher than analysts' estimates, that could help assuage some of the market's fears about an economic slowdown. Two consecutive months of weak job growth and skyrocketing oil prices have heightened these concerns.

Why be a hero?

There are some doubts that Chambers wants to play hero. After all, Chambers learned the hard way during the tech bear market what happens when you overpromise.

"Nobody wants to get their head chopped off," said Susan Kalla, an analyst with Friedman Billings Ramsey. "John Chambers doesn't know the future. There are huge penalties for saying things are getting better and then not delivering so even if he saw that things were up, he likely wouldn't say it."

What's more, even if Cisco does beat expectations and raise guidance, it might only lead to a short-lived sense of euphoria.

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Becklean points to blockbuster results reported by Cisco rival Juniper Networks last month. Shares of Juniper surged 10.5 percent the day after its report but have since fallen 15 percent.

"We're in a market where you don't get any credit for a great quarter. I don't think beating the numbers will benefit Cisco very much," Becklean said.

The good news, all the analysts said, is that barring a major negative surprise, there's probably not much downside left to Cisco's stock, which has fallen 17 percent this year and now trades at 23 times fiscal 2005 earnings estimates. At worst, Cisco's results will cause investors to shrug, not panic.

But Kalla argues that because Cisco is such a bellwether, there's no reason for the stock to start heading materially higher until there is a clearer indication of which way the economy's going.

"Cisco moves with the market. It is the market. Oil pries have to come down. The jobs numbers have to get better," Kalla said.

Investec's Davies owns shares of Cisco but his firm has no investment banking ties to the company. None of the other analysts own shares of Cisco and their firms do not have banking relationships with it.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.