Cisco falls from grace

Although its "price-to-earnings" (P/E) ratio is still a lofty 70:1,

Cisco Systems appears to be falling out of favor among Wall Street investors.

The company’s stock took a $5 hit on Wednesday on which nearly 300 million

Cisco shares changed hands, second only to an Intel one-day trading record.

Wall Street reacted to the announcement by Cisco that it had missed profit

targets by just 1 penny in the most recent quarter. Cisco’s shares have sunk

from $85 just eight months ago, to $31 on Wednesday. Cisco’s decline is the

result of a combination of factors that are likely to continue over the next

couple of quarters. With one dotcom company after another closing up shop, Cisco

is losing a sizeable market for its networking gear. At the same time,

traditional companies are curtailing investments in new networking systems as

they ride out the current slowdown.

And telecommunications companies too have been cutting back on capital

investments for the last four months. Still, Cisco had a formidable quarter by

any standards. Sales rose 55 per cent to $6.75 billion, slightly below estimates

of $7 billion. And profits rose 48 per cent to $1.33 billion, up from $897

million a year ago.

Cisco CEO John Chambers downplayed the significance of the fact that the

company missed profit targets for the first time in seven years. ''While we

remain cautious about the implications of a brief pause in the current 10-year

expansion of the US economy, we believe that Cisco has never been better

positioned to help our customers solve their two most important business issues:

increasing productivity and creating new sources of revenue."

And he remains bullish about the future. ''We remain confident about the

market opportunity ahead of us over the next three to five years. This

confidence is based on the continued impact of the Internet on productivity, and

just how much more work needs to be done before every company is an e-company

and a majority of the world's countries are e-countries.

As one sign of Cisco’s problems, the company said its unsold inventories

grew by $577 million during the quarter. That amounts to a record buildup. Cisco

executives said the back up of inventories came on top of the nearly $2 billion

inventory backlog the company reported for its fiscal first quarter that ended

in October. The mounting inventories are concentrated in "raw

materials" and "work in progress" the early stages of its

production process, as opposed to finished goods that were ready to ship.

The sharpest decline has come from suppliers of high-speed Internet access

over phone lines who buy Cisco’s "alternative access" equipment.

Also, Cisco’s accounts receivable grew $625 million to $3.5 billion in the

second quarter.