All good things must come to an end. Fine wine goes bad, great athletes fade, and even Supreme Court justices retire.
I think it is time for an icon of the tech world to exit gracefully from the stage. He has long since become a hindrance to his company, and more importantly to his company’s stock price and prospects. He is John Chambers of Cisco (CSCO).
Once an effective chief executive, he has spent a good portion of the last decade wasting shareholder wealth on ill-conceived acquisitions, trying to move Cisco away from its core enterprise market to the consumer market and more untold billions on stock buybacks.
Chambers has been CEO for this company for 17 years. He did a fantastic job growing this enterprise through the boom years of the '90s, and did a credible job of managing the company through the bust of the early 2000s. Unfortunately since then, both Cisco’s stock price and Chambers have been stale.
CSCO has been dead money for a decade. It has continually lost market share and its innovational edge to smaller competitors like Juniper (JNPR) Chambers has allowed the company to grow 59 internal committees before the latest reorganizational announcement after the earnings release yesterday. Cisco has tried and failed numerous times to penetrate the consumer market, the most infamous being the “Flip” camcorder. It had a successful product that sold over 2mm devices, at one time accounting for 37% of camcorder volume on Amazon (AMZN). Cisco recently shut down this division only a few years after acquiring it. It only initiated a dividend this year, despite massive cash flow and balances that had built up consistently over the years.
What a new CEO should do
A new executive would be a breath of fresh air and could do a few key things to quickly move up Cisco’s valuation, which is currently only a little over eight times this year’s earnings if you strip out the almost $4.50/share in cash on its books.
- Focus the company on the enterprise market, sell or close all divisions focusing on the consumer market.
- Raise the dividend to provide a 3-4% dividend yield, which would be less than a 40% payout. Cisco has ample cash flow to support this dividend level, and CSCO already has $25B in net cash on the balance sheet.
- Maniacally focus on streamlining the management structure and take costs out of operations, while maintaining or boosting R&D levels.
- Refrain from non-strategic mergers outside of its core switch and router enterprise market.
I believe if a new CEO took these simple steps, CSCO could easily be worth 12 times this year’s expected earnings of $1.60 adding in its $4.50/share cash hoard in the short to medium term. This would result in a stock price of $23.70 or 40% above its current level.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours.