New product polishes a positive outlook for Cisco

Q. I am 27, consider myself an aggressive investor and add a significant amount to my portfolio on a regular basis. I own shares of Cisco Systems Inc. What is the outlook for the company?

–T.D., via the Internet

A. The world’s largest maker of equipment that directs Internet traffic is so confident that the economy and capital spending are improving that it plans to hire 1,000 workers through the rest of 2004.

It recently launched its much-ballyhooed CRS-1 router that targets its largest customers. Available in July, this high-end product with a starting price of $450,000 will do battle against a popular Juniper Networks router introduced two years ago.

In addition, Cisco Systems just bought some assets of equipment-maker Procket Networks Inc. for $89 million in cash in order to expand its engineering team.

But though the net income for its most recent quarter rose 23 percent due to increased demand for its networking products, those results didn’t knock anyone’s socks off. There is still skepticism as to how the recovery will affect corporate spending on technology.

The explosive growth that the company enjoyed in the booming 1990s is unlikely to return. Equipment demand is volatile and difficult to forecast, even though Cisco dominates corporate networking. It accounts for 85 percent of global router sales and 50 percent of Ethernet switches. One-third of its total sales are outside North America.

Shares of Cisco are down slightly this year, following a gain of 85 percent last year. Cisco’s board recently authorized the repurchase of as much as $5 billion of the company’s stock.

The consensus recommendation on Cisco shares is a “buy,” according to the Boston-based First Call research firm. That consists of 13 “strong buys,” 14 “buys,” 13 “holds” and one “sell.”

In a recent filing with the Securities and Exchange Commission, the company acknowledged that the cost of expensing its employee stock options in its financial accounting would have cut profit in its most recent quarter by one-fourth. Critics say options inflate earnings because companies don’t count them as a business expense, while Cisco contends there is no consistent method for valuing options.

Cisco earnings are expected to rise 25 percent in 2004, versus the 123 percent increase forecast for the communications equipment industry. Next year’s projected 16 percent rise compares with 26 percent predicted for its peers. The company’s five-year annualized growth rate is pegged at 15 percent, identical to the industrywide expectation.

Q. I have $10,000 to invest in an individual retirement account and plan to pick several mutual funds. What is your opinion of American Century Income and Growth?

H.K., via the Internet

A. It’s a combination of human and machine.

This low-expense, low-turnover fund uses computer screens to help it meet its goal of staying a bit ahead of the Standard & Poor’s 500 index. Its annual expense ratio is 0.69 percent, or about half that of other funds in its category.

The $3.7 billion American Century Income & Growth Fund is up 16 percent this year to rank in the upper one-third of all large-value funds. Its three-year annualized return of 1 percent puts it at about the midpoint of its peers.

“Performance-wise, this fund has had steady, risk-adjusted returns that exceeded the S&P 500 in 3-, 5- and 10-year annualized periods,” said Dan Culloton, analyst with Morningstar Inc. in Chicago. “American Century is also one of the fund shops that have not–so far at least–been tarnished by the mutual fund trading scandals.”

This fund’s experienced management team consists of John Schniedwind, Kurt Borgwardt, Vivienne Hsu and Zili Zhang.

None of its members like to be lumped in with pure quantitative managers because they consider themselves active managers significantly adding to returns by overriding the computer models. Nonetheless, they often do let the models run the portfolio, said Culloton.

“If you think that the market is pretty efficient, yet want an actively managed core holding that tries to beat the broad market, this is a decent approach,” said Culloton. “It’s a trustworthy place to keep your money.”

One-fourth of the portfolio of American Century Income & Growth Fund is in financial-services stocks, with other significant concentrations in consumer goods and health care. Its top stock holdings were recently Citigroup, Bank of America, J.P. Morgan Chase & Co., Intel Corp., Federated Department Stores Inc., ChevronTexaco Corp., ACE Limited, Procter & Gamble Co., Microsoft Corp. and IBM.

This “no-load” (no sale charge) fund requires a minimum initial investment of $2,500.

Q. I am 41 years old and just starting a Roth individual retirement account. Should I get a “load” or a “no-load” fund? What should I look for in a Roth IRA fund?

J.F., Cromwell, Conn.

A. Load funds require a commission, while no-load funds are commission-free.

While fees do cut into returns, what really matters is a fund’s return after commissions are taken into account.

The structure of load funds, generally bought through a broker or financial adviser, can be: (1) a front-end load with commission varying from 3 percent to 6 percent, (2) a gradually declining back-end load when shares are sold or (3) a level load paid annually.

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“What you’re basically paying for in a load fund is the advice of the broker who sells you the fund,” explained Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc., Bloomfield Hills, Mich.

Most load funds also charge annual distribution fees for promotional costs, called 12b-1 fees, that can be 0.25 to 0.75 percent of asset value. While some no-load funds also charge 12b-1 fees, those that don’t are deemed true no-loads.

At your age, Capelli Dimitroff advised, look for long-term growth with reasonable volatility because you’ll have the fund a long time. Remember that the Roth IRA should be the last investment that you ever tap, since it’s tax-free rather than simply tax-deferred.

Q. I see the term “pro forma” used in news stories about company earnings. What exactly does this mean?

D.P., via the Internet

A. Pro forma means “as if,” according to Dan Noll, director of accounting standards for the American Institute for Certified Public Accountants in New York City.

For example, a company may state what its bottom line would have been if it didn’t include the depreciation of a building, the restructuring of its assets or the acquisition of another company.

Investors should be aware that while some companies use pro forma information to clarify their situations, others use it simply to remove anything that might not look good in their financials. This can provide a “pie in the sky” positive spin on results.

“If a company is going to use pro forma numbers in a press release or elsewhere, it is required to reconcile them to the GAAP numbers so that the investor completely understands the whole picture,” said Noll.

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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].