Wednesday, May 6, 2009

Cisco Reports a Miserable Quarter: Stock Therefore Expected to Soar

Because my sister has twice worked for Cisco Systems ("CSCO") and twice quit, this former growth darling has elicited a special interest. CSCO reported earnings today. The best way to see the trend of business is to click on this link, which in the modern fashion, the company (a master of the Net) makes it difficult for interested parties to find.

A little context: Year on year, the global economy has grown in nominal terms. As a leading company in a secular growth industry, and allegedly one with best of breed products and marketing, one would therefore expect CSCO to have at least grown sales equal to the nominal growth in global GDP.

CSCO in fact reported sales down 17% yoy and earnings down 21%, whether GAAP or its preferred non-GAAP metric.

Orders from emerging countries were down over 30% yoy. India, which is not even in recession, had orders down about 40%.

In about the last 7 years, CSCO has spent $56 B on share repurchases. Average cost: $20.43 per share. The stock closed at $19.61, up strongly on the year. Dividends to shareholders have never been paid. The CEO and top management have been very well paid.

The $56 B spent/wasted on share repurchases is 50% of the current market value. If instead of repurchasing stock, which of course allowed optionees the best chance of cashing out at a profit, CSCO had paid dividends and repurchased no stock, loyal shareholders would have had a 50% return of their capital. Yet despite drastically underperforming the global economy recently, CSCO persists in treating itself as a dynamic growth company, rather than the lumbering behemoth (sales $8.2 B this quarter) it has become.

As with GE, Wall Street loves Cisco, and for the same reason. These companies do lots of deals, so they make Wall Street rich. Please click on the Wikipedia link to see the number of acquisitions CSCO has made over the years.

9-10 years ago, when Cisco stuffed its employees full of its wildly overvalued stock, I advised my sister to sell all she could. I first advised this when it was at $40 and dropping from its peak level, then at $18-22 as it was collapsing. My advice was that you never know what the shape of the curve of overvalued growth companies grown to be large companies would be, but history teaches (I said then) that in retrospect, valuation matters and everything tends toward fair value eventually.

Now, Cisco Systems is a tired company that has made John Chambers and other insiders fabulously wealthy. Investment bankers and stockbrokers have generated large fees year after year brokering deals and stock trades, respectively.

Even though it is a "public" company, CSCO exists for the benefit of the above groups. Why anyone else would want to be an owner of a company that is losing share of the global economy and that has treated its legal owners shabbily is a question that perhaps your financial adviser can answer.

I can however guarantee you that if CSCO were private, it would have been paying out large dividends to its owners year after year. The board and management would have howled with laughter if anyone had proposed buying in stock from its owners to "create shareholder value".

Coyright (C) Long Lake LLC 2009

No comments:

Post a Comment