Cisco Systems: One Big Day...
This tech giant's stock surged on Wednesday. What does it mean?
If you're seriously into stocks, it's fun to spend a moment checking the day's biggest winners -- the stocks that rise 15% or more. Usually, the Nasdaq winners' list includes a bunch of obscure Internet names, often connected to China. The New York Stock Exchange's daily champs usually reflect super earnings surprises or unexpected takeover offers. All in all, though, one-day wonders tend to be all about the stocks and little about the overall market or its sectors.
But when a widely followed issue, such as Cisco Systems, makes the daily honor roll, as it did Wednesday by soaring 14.4% (that's close enough to 15%), you might fairly ask if the news is bigger than what came out of one company. Technology-stock bulls have, for some time, been arguing that blue-chip tech stocks, such as Cisco, Microsoft and Oracle, are dreadfully undervalued and that tech earnings are ready to pop because cash-rich businesses are due to spend more on hardware and software.
But tech stocks haven't been cooperating. For instance, Before their Wednesday pop, to $19.78, Cisco shares (symbol CSCO) had been roughly even in 2006, despite the company's earnings having beaten analysts' estimates in each of the three prior quarters.
Make that streak four, now. Cisco on Tuesday reported quarterly earnings of 30 cents a share, better than the estimate of 28 cents. And perhaps equally important, its revenues exceeded the analysts' estimates and the company's previously-published "guidance." Moreover, in reporting the numbers, Cisco's longtime CEO, John Chambers, predicted that Cisco would maintain strong sales and earnings momentum for 2007. Cisco achieved market-share gains in many of its businesses, Chambers noted. (Cisco is best known for making Internet routers, but it has made a lot of acquisitions in data storage and voice-over-Internet protocol, or VOIP, telephone communications.)
Based on Chambers's comments, analysts issued plenty of glowing forecasts for the stock. For example, Joel Fishbein of Janney Montgomery Scott says Cisco ought to earn $1.26 a share over the next four quarters, up from $1.10 for the most recent four quarters. If Cisco traded at 20 times earnings -- not at unreasonable expectation -- the stock could see north of $25 by next summer, Fishbein suggested. Other forecasters have the numbers working out to a price of $28 to $30 in a year.
However, remember that one of the linchpins of such optimism is the economy, which is likely to weaken more before it booms again. And if Cisco should fall short of its guidance by even a hair on any of these financial categories, the market is apt to chop the shares by 10% in a flash. "In the latter stages of a bull market, investors get less and less forgiving," says Sam Stovall, the chief investment strategist of Standard Poor's, who isn't surprised that many high-quality companies have suffered 10% or worse one-day hits during this earnings season. It's easy to imagine that had Cisco earned 26 cents a share instead of 30 cents, its stock might have gone from $17.50 to $15.75.
Cisco's price-earnings ratio is more volatile than most, having ranged from 15 to 278 over the past ten years. Its stock looks cheap, but it has been cheaper. Oh, and by the way: Does this banner day for Cisco mean anything profound for tech? Not likely. The Nasdaq Composite Index, of which Cisco is a major component, barely budged. Microsoft and Oracle posted small gains on Wednesday, Dell and Apple small losses. Meanwhile, a money-losing Chinese company that does who-knows-what, China Development Group Corp., gained 25% on the Nasdaq.