Board-Ansicht
Mix-Ansicht- Cisco - who needs visibility? - leibovitz, 12.12.2001, 14:10
Cisco - who needs visibility?
Grant's Investor: Cisco - who needs visibility?
Grant's Investor: Cisco sees nothing but blue skies ahead, despite an admitted lack of visibility. And investors are only too willing to agree. But we’re sticking by our story — Cisco’s prospects remain overrated.
This week, Cisco hosted its “Worldwide Analyst 2001 Conference” in beautiful Santa Clara, Calif. As usual, we were stuck in lower Manhattan. But we did manage to feel the blast of hot air coming from the company and its many admirers. Perhaps, as CEO John Chambers says, business conditions at Cisco are not getting any worse, but they certainly aren’t getting significantly better either. Despite the company’s lackluster growth prospects, CSCO shares still sport a towering valuation. Additionally, there is the issue of Cisco’s inventory buildup despite the infamous $2 billion write-off (as detailed in our previous Cisco report). Cisco currently trades at about eight times trailing sales and at about 100 times 2002 earnings estimates and 55 times 2003 estimates. To put it mildly, these are generous multiples given that the conference consensus was for even less enterprise, or general corporate, spending on IT next year than what was spent in 2001. As for cap-ex by service providers, the other major customer category, Cisco management believes it will be down 12% next year.
Grant’s Investor also sees a new area of concern that investors should watch carefully. In order to assist IT managers with their shrinking cap-ex budgets, Cisco Capital — the company’s financing arm — intends to become more aggressive in its leasing program, specifically operating leases. Explaining the virtues of operating leases over capital leases, Chambers says that with the former, the company can “recognize the revenue over a period of time that gives you a smoother revenue run rate and more predictability and you aren’t so dependent upon a whole rash of orders to make the revenues each time.” That sounds nice. And Chambers didn’t mention that the other nice thing about an operating lease, from Cisco’s perspective, is that the company can keep the product on its books as an asset but not as inventory, thereby mitigating any pesky days-of-inventory problem (one of its professed goals is to improve inventory turn). Not only that, but the asset is depreciated just like property, plant and equipment.
So when it comes time to report earnings, Cisco might decide to exclude the depreciation expense from its pro-forma results. In addition, operating leases are not carried as accounts receivable (another pesky balance sheet problem). This is similar to the way the big automakers account for customer financing. But the underlying fundamentals are not so easy to change. Nevertheless, Cisco management insists that Cisco Capital is not just a way to juice sales. Chambers says it will be “a major money maker on its own.” He also says it will be focused on profitability and will not take on any unnecessary risks. We’re curious to see how this plays itself out.
The main point that Cisco management wanted to get across in its conference call? In the words of CFO Larry Carter, “We are bullish on the long term…. Things will turn around.” (Wow! Cisco is bullish on its long-term growth prospects. Now there’s a startling statement.) When it came to more substantive guidance, however, Chambers stuck to another familiar (and contradictory) theme: “Visibility is still very tight in. I wish we could see several quarters out.” No growth, no visibility, impaired customer balance sheets. Our conclusion: If you shorted the stock based on our initial write-up back on Aug. 16, 2000, when CSCO was trading at $63.43, maintain your short position. But for now, we would hold off establishing a fresh short position.
Author: Grants Investor
http://www.breakingviews.com/ve.asp?sid=3459&aid=5349&lid=3
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