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Asking For Comments On Cisco
Old 03-17-2011, 03:05 PM   #1
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Asking For Comments On Cisco

Some really big tech companies with heavy market dominance but widely perceived challenges seem to me to be among the cheapest stocks in America. They are financially strong, have huge cash hoards and steady cash generation, and they are beginning to pay out some of this to shareholders. Last fall Cisco CEO John Chambers said CSCO will begin a dividend in fiscal 2011, which means pretty soon now. At the time he said it will be 1-2% initially, and the exact amount would depend on amoung other things congressional action or dividend tax rates. So the tax news was positive, and if they pay 2% (at that time the stock was a little over $20) that shoujld give about a $0.10 quarterly dividend. We can't know if they will increase it regularly as microsoft has done, but if so this will quickly turn into what seems like a pretty safe and not overpriced income grower type of holding.

Cisco sells only ~15% above where it did at the bottom in 2009 ($17), so it certainly has not been going crazy here.

My question is directed especially to people who may work in that industry, or especially to Cisco customers in switching and router markets- do you see any competitive threats, and how do you assess Cisco's chances of repelling invaders?

Ha
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Cisco Competition
Old 03-17-2011, 04:21 PM   #2
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Cisco Competition

Long time engineer in the tech sector here...

The obvious domestic competitors traded on the NYSE/NASDAQ are ALU, HPQ and JNPR. Huawei (pronounced Wah-way I think) is one of the biggest Chinese competitors. Articles on the web indicate Huawei is making a big push for Cisco's markets. It's hard to say who competitors will be a few months from now and even more difficult to know who will be in the top 5 several years from now.

CSCO will likely be around for a while and the dividend potential seems appealing. My wife and I have TXN from years ago and it's paying us a 16% dividend with our low cost basis and the growth has been tremendous. Maybe CSCO will be doing the same in a few years if the dividend grows and the shares split a time or two. However, it may be a long time before tech companies rival the combined growth and solid income of old-timers like PG, JNJ and others.

I'm not a big tech fan even though I work in the industry. It seems like something that appears to be a minor competitor one day can eat your lunch the next.
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Old 03-17-2011, 05:04 PM   #3
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You do know that large companies are holding onto cash, and not hiring. This also means reduced hardware budgets. Feds and DoD are constrained by budgetary concerns. The result is that Cisco sales are down, as their customer base tries to tread water, just keep the wheels on the wagon.
I don't have a crystal ball. In fact, I thought CSCO would be at $30 at the end of 2010.
Another "problem" I see is the durability of the product. I have a client with 4 routers, that are at least ten years old. In that time I have replaced twice as many non-Cisco switches and wireless routers for the client.
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Old 03-17-2011, 05:07 PM   #4
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Long time engineer in the tech sector here...

The obvious domestic competitors traded on the NYSE/NASDAQ are ALU, HPQ and JNPR. Huawei (pronounced Wah-way I think) is one of the biggest Chinese competitors. Articles on the web indicate Huawei is making a big push for Cisco's markets. It's hard to say who competitors will be a few months from now and even more difficult to know who will be in the top 5 several years from now.

CSCO will likely be around for a while and the dividend potential seems appealing. My wife and I have TXN from years ago and it's paying us a 16% dividend with our low cost basis and the growth has been tremendous. Maybe CSCO will be doing the same in a few years if the dividend grows and the shares split a time or two. However, it may be a long time before tech companies rival the combined growth and solid income of old-timers like PG, JNJ and others.

I'm not a big tech fan even though I work in the industry. It seems like something that appears to be a minor competitor one day can eat your lunch the next.
Thanks for your comment. I agree with your assessment about tech cos trying to maintain a moat, and if even you who work in the industry don't see clear ways to maintain competitive advantage, I likely have little to no chance of understanding well enough to invest confidently.

Ha
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Old 03-17-2011, 06:37 PM   #5
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I've had some Microsoft stock for a while now, so I can see where you are coming from on the value hypothesis, Ha.

My anecdotal data points follow. (I'm a civil engineer, so take this with a grain of salt.)

In a former job, about 5 years ago, I got mixed up in a local government IT networking job. The objective was to build a wide area network connecting several campuses and remote devices scattered on the roadway network across the metropolitan area. This was the organization's largest-ever IT networking project.

Mid-project, there was a change in our agency's IT leadership. The specification for the expensive switching gear changed from one that Cisco could win to one that Cisco would win for sure. The project turned out just fine, although not necessarily at the most cost-effective total cost of ownership.

I was reminded of the old saw from the 60's - 80's: "nobody gets fired for choosing IBM." The IT chief was willing to spend extra for high quality and a high chance of success.

Fast-forward to today. The network still works fine and Cisco is still earning their (high) annual payments for extended warranties. The chances of Cisco landing another big networking sale to this client are pretty slim, however. Even if there was a need to expand or upgrade the network, the agency is now operating on an overall budget that is much tighter for both operating and capital expenses.

I have no doubt Cisco will remain a strong player in the networking wars, with the technical and financial ability to protect its market share. But I have three hesitations that keep me from investing:
  • Cisco hasn't been particularly successful in developing products for the consumer market. Thus it is unlikely they will see sales growth through cultivation of a series of "hit" products
  • In the short to medium term, I wonder about the ability and willingness of their business and government clients to turn loose on capital spending, especially since for many of those customers Cisco spending would be for "support" vs. production equipment
  • The boom years of the 90's and 00's saw a tremendous growth in network reach and capacity. Orders of magnitude growth. Cisco rode that rocket very successfully. But are we likely to see a leveling off in the need for ever-greater bandwidth, leading to a more mature marketplace with slower replacement cycles? If so, where will the sales growth come from?
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Old 03-18-2011, 03:17 PM   #6
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I've worked with mostly Cisco gear my whole professional life. I am a buyer of Cisco stock at these levels.

Most of my customers over the years have been very large enterprise companies. Big banks, financial services companies, retailers, etc. In these markets, I still do not see much practical competition for Cisco's products. Juniper is supposed to be making big inroads in routing and switching, but I've never actually seen any of their gear on a production network. Maybe they service the carrier market more than the enterprise market?

Cisco is no longer a strong growth story, but at these price levels they don't have to be. The stock can generate an adequate return from stock buybacks and dividends. Note, I own MSFT with that same philosophy and that is a stock that has tested many people's patience.

The big dislike I have regarding Cisco is that they continue to try to pretend that their employee stock options don't have real costs. Their non-GAAP numbers are garbage, and I pretty much ignore them.
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Old 03-19-2011, 09:11 AM   #7
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From Friday's AP financial news:

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Cisco Systems Inc., the world's largest maker of computer networking gear, on Friday said its first-ever cash dividend will amount to 6 cents per share and will be paid on April 20.
Cisco announces first dividend - Yahoo! Finance
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Old 03-20-2011, 03:24 PM   #8
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I think with this step, they are acknowledging that their growth stage has passed and they will be a lackluster stock like Microsoft!
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Old 03-21-2011, 06:20 PM   #9
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I held CSCO for a couple of years and got it sold off from me in the May 6th "flash crash". I've not considered owning it again, it was a wash: I neither gained nor lost on it.

Based on my profession, I should be "tech-savvy", but gosh darn those tech stocks always have me stymied... so I don't do them anymore.
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Old 03-22-2011, 10:21 AM   #10
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With lots of trading, one could have made money from CSCO, INTC, TXN, etc. But the reality is that these stocks have gone pretty much nowhere for ten plus years...

I own them in whatever percentage of total market and/or S&P500 index they are.
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Old 03-24-2011, 02:15 PM   #11
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What were their valuations at the beginning of that 10 year period compared to now?

If a company has a good business and earnings, but they started out wildly overvalued, they can become a smoking good investment after 10 years of doing nothing.

I think CSCO and MSFT are two businesses that are extremely undervalued right now.


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With lots of trading, one could have made money from CSCO, INTC, TXN, etc. But the reality is that these stocks have gone pretty much nowhere for ten plus years...

I own them in whatever percentage of total market and/or S&P500 index they are.
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Old 03-25-2011, 08:45 AM   #12
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What were their valuations at the beginning of that 10 year period compared to now?

If a company has a good business and earnings, but they started out wildly overvalued, they can become a smoking good investment after 10 years of doing nothing.

I think CSCO and MSFT are two businesses that are extremely undervalued right now.
Well, in all fairness, TXN has doubled from the lows in the 2001 period, but CSCO and INTC are pretty much flat since then. This is not including the tech bubble period. And TXN has hit a wall in the mid-30s, which seems to be the top-end barrier.

Not saying they aren't good companies, just that whatever potential they have hasn't been rewarded by Wall St. Heck, CSCO has $4.5B in cash, and another $35B in short-term investments, with INTC not that far behind at $6B/$16B...
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Old 03-25-2011, 10:21 AM   #13
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Well, in all fairness, TXN has doubled from the lows in the 2001 period, but CSCO and INTC are pretty much flat since then. This is not including the tech bubble period. And TXN has hit a wall in the mid-30s, which seems to be the top-end barrier.

Not saying they aren't good companies, just that whatever potential they have hasn't been rewarded by Wall St. Heck, CSCO has $4.5B in cash, and another $35B in short-term investments, with INTC not that far behind at $6B/$16B...
These are all mature companies. One thing pretty sure is that last period's price performance is not available for next period's.

Incidentally, Donald Yacktman who runs a very long term winning stock value fund just bought into Cisco.

I just bought Microsoft. Microsoft has big re-invention challenges, but it is fairly certain that at the current price there is little risk in paying to see how they do. I tend to have the same idea about CSCO.

Thanks everyone for all the coments and shared experience and knowledge!

Ha
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Old 03-25-2011, 05:38 PM   #14
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CSCO's low during that time was $8/share. It's doubled off the bottom as well, even after this decline.

I bought my first shares at $10/share in that time period.

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Well, in all fairness, TXN has doubled from the lows in the 2001 period, but CSCO and INTC are pretty much flat since then. This is not including the tech bubble period. And TXN has hit a wall in the mid-30s, which seems to be the top-end barrier.

Not saying they aren't good companies, just that whatever potential they have hasn't been rewarded by Wall St. Heck, CSCO has $4.5B in cash, and another $35B in short-term investments, with INTC not that far behind at $6B/$16B...
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Old 04-05-2011, 08:32 PM   #15
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This article suggests CSCO's CEO will be shaking things up a bit:

Chambers Says Cisco Will Make Targeted Moves to Fix Its `Lost Credibility' - Bloomberg

The text of his memo:
http://blogs.cisco.com/news/message-...g-the-network/

This article essentially says it remains a value trap:

Cisco: Don’t Be Tempted, Says Gleacher, More Deterioration To Come - Tech Trader Daily - Barrons.com

I remain on the fence...
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Old 04-08-2011, 11:37 AM   #16
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I bought CISCO and Microsoft. Smaller than my Walmart position, smaller then Abbott Labs, but not so-called "hormone" sized. They each have problems, but IMO they each have huge resources financial and human and at current levels seem to me to present value for a patient buyer. Anyway, the only good buys around are these (and other) large very sound companies, so I think we will be glad we partook when we look back. They should reasonably prosper over time, and should also suffer less risky in market downdrafts. With this kind of company you may worry about long term market retention and innovation issues, but you are not going to worry about financing or credit pressures.

I appreciate all the comments that were given.

Ha
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Old 04-08-2011, 11:52 AM   #17
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Last week, I added MSFT to my dividend-paying equity portfolio which now consists of ABT, JNJ, MSFT, PEP, PG, SYY, and WMT.

If CSCO starts paying ~2%, I might take the time to evaluate it. Right now, it's off my radar screen.
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Old 04-08-2011, 12:11 PM   #18
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CSCO has done for me about what MSFT has done for many years...NOTHING!!! John Chambers is a pretty good CEO but I don't see where they can get the sales revved up like the 90's..........
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Old 04-08-2011, 12:33 PM   #19
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Jim Cramer says Cisco not yet. I knew you all would appreciate that update....
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Old 04-08-2011, 12:44 PM   #20
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CSCO has done for me about what MSFT has done for many years...NOTHING!!! John Chambers is a pretty good CEO but I don't see where they can get the sales revved up like the 90's..........
That is the point. At current prices, they don't have too. Years of increasing sales, pretty well maintained margins, giant cash buildup, but little or no price advance is one thing that can can make a value proposition. If you can determine that they are not buggy whip stocks, the worst case should not be particularly bad.

Re: the low dividend, CISCO plans asset conversion activities, and I believe they are wise to start slowly. It is cheap enough that likely there will plenty of oppportunity to re-evaluate at higher prices. But I do understand that it will not meet everyone's needs.

Currently (since march 09) every piece of junk is flying, as usually happens when the printing presses are getting hot. Sharpies understand that moderate to low market cap, speculatively financed companies that might have been technically if not legally bankrupt before the money flood will fly as they now live to fight another day. This money pouring into junk creates at least relative bargains and sometimes absolute bargains among the cream stocks.

Ha
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