Q. With technology stocks doing well again, can we expect Cisco Systems Inc. to lead the way?
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— J.R., via the Internet
A. There is genuine cause for optimism at the leading maker of routers and switches through which Internet and other network traffic pass.
The health of the economy and telecommunications industry, however, will determine its success.
“We are slowly seeing increasing, very cautious business optimism in capital expenditures,” Chief Executive John Chambers said recently as Cisco announced encouraging quarterly earnings of $1.09 billion compared with $618 million a year ago.
Many small telecommunications carriers who were once its customers have failed, bigger firms are still tight with their money and equipment demand is volatile.
Yet Cisco’s results are stronger than most other tech firms and it has the financial muscle to gain on its competition in downturns. Its balance sheet and cash position are strong.
Cisco shares are up 73 percent this year, following declines of 28 percent in 2002, 53 percent in 2001 and 29 percent in 2000. Chambers recently made $38 million by selling 2 million shares of his company’s stock, exercising some options that were due to expire Aug. 16, 2004.
The company accounts for 85 percent of global router sales and 50 percent of Ethernet switches, with customers outside North America representing one-third of its sales. Its telecom equipment is an important factor in both developed and emerging economies, though it has rivals that could erode its market share. For example, China’s Huawei Technologies has won significant contracts abroad.
Cisco remains aggressive in buying smaller companies, though it’s always financially prudent in its deals. It recently announced it would pay about $80 million to buy Web-based conference softwaremaker Latitude Communications Inc., whose software permits office workers in different locations to share and distribute documents over the Internet.
Despite economic uncertainties, shares of Cisco currently receive a consensus “buy” rating from Wall Street analysts who track them, according to Boston-based First Call. That consists of 31 “buys,” 16 “holds” and two “sells.”
Earnings are expected to increase 16 percent this year, versus a 98 percent gain for the communications equipment industry. Its expected growth rate for next year is 13 percent. And its projected five-year annualized gain is 15 percent, slightly better than the 13 percent expected industrywide.
Cisco shareholders recently approved a proposal to increase the number of shares available to employees under a stock-purchase plan by 100 million.
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Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, CA 94901-3581, or by e-mail at [email protected].