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I do
not often comment on individual stocks, especially technology stocks.
However, I want to point out a couple of things that I have been saying for
quite some time that came up in Cisco's second-quarter results announced this
evening.
1. Margin
compression will start affecting corporate earnings.
2. Cutbacks at
state and local governments will have a bigger impact than most think.
Cisco managed to tie those two themes together. CEO John Chambers blamed the
public sector for a miss on profits and competition for a miss on margins.
Please consider Cisco spooks Street
again with weak outlook, margins
Network
equipment maker Cisco Systems Inc's CEO John Chambers spooked investors for
the third time in as many quarters, warning of dwindling public spending and
weaker margins from tough competition.
Chambers upset investors last August with a warning of "unusual
uncertainty," and followed up last quarter with a weaker-than-expected
outlook that he blamed on weak orders from debt-burdened government agencies.
He offered no relief this quarter.
"Unfortunately, we believe that our concerns in the public sector will
continue to be challenging in the developed world for the next several
quarters," he said, adding that Cisco's government accounts in the
United States, Europe and Japan had all been hit in the fiscal second
quarter.
"The challenges at state, local, and eventually federal level in our
opinion will worsen over the next several quarters," he said of the U.S.
market.
Cisco's second-quarter gross margin fell to 62.4 percent from 64.3 percent in
the previous quarter, raising analysts' concerns that growing competition may
be forcing the company to cut prices to protect market share.
The company forecast margins to be around 62 to 63 percent for the rest of
the fiscal year, which ends in July.
Cisco also let down investors with a third-quarter outlook of earnings
excluding items of 35 cents to 38 cents per share, below Wall Street
expectations for 40 cents. And it said sales growth for the full year would
likely be at the mid- to low-end of a previous 9 to 12 percent outlook.
Analysts said the outlook and low margins, a signal it may be cutting prices
in response to tough pressure from competitors like Hewlett-Packard Co,
overshadowed stronger-than-expected results for the second quarter.
"I think that's a way to cover up that they are facing competition in
their more mature business lines and that they are most likely going to use
price as a weapon to hold market share, and this is going to pressure
earnings and margins," said Channing Smith, managing director and
co-manager of Capital Advisors.
Cisco and HP used to be resale partners, but turned rivals after Cisco in
2009 unveiled plans to enter HP's territory of data center servers. HP in
turn challenged Cisco by buying network equipment maker 3Com for around $3
billion.
Both sides have lately been raising the stakes with discounts, zero-interest
leasing and pay-later schemes.
"We believe long-term investors should ride out the storm. If your
time-frame is longer than the next six months, we believe Cisco's growth
opportunities rival that of Apple and Google," said Smith.
Growth
at What Price?
Channing Smith's idea that Cisco's growth rivals Apple or Google seems rather
preposterous. Regardless, the important question is "How much you want
to pay for the growth at Apple or Google, vs. Cisco?"
I suppose one can make a case many ways on that, but it is important to
phrase the issue properly.
John Chambers 2010 Stock Sales
Inquiring minds just may be interested in Cisco Insider Sales. Here are the transactions for John
Chambers alone.
·
Sep 16, 2010 285,000 Acquisition (Non Open Market) at $0 per share.
·
Aug 18, 2010 243,178 Automatic Sale at $22.50 per share - $5,471,505
·
May 18, 2010 22,273 Automatic Sale at $25 per share $556,825
·
May 17, 2010 1,000,000 Option Exercise at $16.01 per share.
·
May 17, 2010 1,250,000 Automatic Sale at $24.61 per share - $30,762,500
·
Mar 05, 2010 1,800,000 Option Exercise at $16.01 - $20.53 per share.
·
Mar 05, 2010 1,800,000 Automatic Sale at $25 per share -
$45,000,000
·
Feb 08, 2010 2,000,000 Option Exercise at $18.57 per share.
·
Feb 08, 2010 2,000,000 Automatic Sale at $23.73 per share - $52,206,000
Lather, Rinse, Repeat
Cisco Monthly Chart
Chambers has not done a damn thing for shareholders for 10 years, cashing out
hundreds of millions of dollars along the way. From the perspective of a shareholder
of a publicly traded company, Chambers is not worth a damn cent
Mish
GlobalEconomicAnalysis.blogspot.com
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