Cisco's stumble creates a time to buy

Regard CEO John Chambers' downbeat outlook skeptically. This tech giant tends to underpromise and overdeliver.

By Jonathan Berr Aug 16, 2013 11:43AM

During the height of the Internet bubble, the one stock that many people felt they had to own was Cisco Systems (CSCO), a provider of the technological underpinning that keeps the Internet running. Now, the company that some thought was invincible has fallen back to earth. And that's making its stock an attractive buy.

 

Shares of the San Jose, Calif., company, which topped $64 in 2000, plummeted yesterday, falling 7.2% to $24.49 in the wake of CEO John Chambers' cautious earnings outlook for the year. The company also announced plans to cut 4,000 workers even though its quarterly earnings were better than Wall Street expected.

Because its equipment is used by so many big corporate and government clients, Cisco is also viewed as a bellwether for the broader economy.  

 

Although Chambers, who is well-respected on Wall Street, said during the earnings conference call that he was proud that the company delivered what he called "record results," he also sounded worried about the challenges that lie ahead. He called the current economic recovery "more mixed and inconsistent than others I have seen."

 

In the U.S., Cisco increased sales with large enterprise customers by 9% and saw a 12% increase from commercial customers. But that wasn't enough to offset a 30% drop in Asia. Sales in Europe were also weak.

 

The Cisco logo is seen at the NCTA Cable Show in Washington, DC, on June 11, 2013 (© Andrew Harrer/Bloomberg via Getty Images)Much of Cisco's previously explosive growth has been tied to the massive data centers big companies have built. However, that market has cooled, and Cisco hasn’t expanded fast enough in new areas that have growth potential, such as cloud computing, to make up the difference, according to The New York Times.


Chambers is admired for being proactive in anticipating industry shifts, which is why he's cutting Cisco's workforce and slashed its earnings outlook for the year.


He certainly has no need to panic, however, because the company's earnings appear to be fine. Net income in the last quarter rose $2.27 billion, or 42 cents per share, versus $1.92 billion, or 36 cents per share, a year earlier. Revenue rose 6% to $12.42 billion.

 

Some might wonder whether Chambers is being overly conservative with his forecast, given his reputation for underpromising and overdelivering for shareholders. That would make this a good time to buy Cisco. The shares certainly are cheap, trading at a price-to-earnings multiple of 14.18, which is well under their five-year high of 20.89, according to Reuters. The average 52-week price target on Cisco is $26.88, about 10% above where it recently traded.

 

Investors can put their faith in Chambers, who has been CEO since 1995. He survived the dotcom bust and certainly can endure whatever challenges lie ahead in the current economic climate.


Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
Tags: CSCO
6Comments
Aug 16, 2013 1:45PM
avatar
Pretty sure the time to buy Cisco was in 1996.
Aug 16, 2013 12:27PM
avatar
"Cisco's stumble creates a time to buy"

 

Perhaps, but one man's opportunity to "buy on the dips" is another man's "dump it" signal.

Aug 16, 2013 12:47PM
avatar
The way this company was "SNATCHED" away from its founders. It seems fitting in the Karmic Scale.   
Aug 16, 2013 3:19PM
avatar

I'm sure that the Chinese are putting 4,000 workers to work, trying to copycat all of Cisco's patent products to replace all of Cisco's lost sales in Asia.

Need a job? Speak Chinese? Work for $0.90/hour?

Aug 16, 2013 12:24PM
avatar

How does Chambers keep his job?They charge way too high for their products.In 2000 it was

$82 a share.He was telling his BS how how great everything was while the stock dropped

to $7.It`s dead money until he`s gone.He must have pictures to keep his job.

Aug 16, 2013 2:08PM
avatar
Overpriced, Unethical, Lousy customer service model, and the things they get away with legally are amazing. Obviously have bought off the DOJ. Just look at the crap they pulled on Multiven and Brazil. There are better options. Their Service SMARTnet is crap, they charge at least 30% more than necessary, Again Service Company Multiven charges a minimum of 30% less for a better service model including Bug Fixes, Patches etc. These guys are dinosaurs.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT TECHBIZ

Start investing in technology companies with help from financial writers and experts who know the industry best. Learn what to look for in a technology company to make the right investment decisions.

RECENT POSTS

VIDEO ON MSN MONEY

RECENT QUOTES

WATCHLIST

Symbol
Last
Change
Shares
Quotes delayed at least 15 min

MSN MONEY'S