Cisco Systems (NASDAQ:CSCO) may print cash like the Federal Reserve but that doesn’t mean anyone should be piling into the name right about now. The firm’s latest strategy to spruce up profits involves firing 14% of its workforce (10,000 people) and it seems like a deceptive tactic to take attention away from the real issue … subpar growth. Sure taking heads will save the firm roughly $1B in 2012 but that doesn’t change the fact that the firm is struggling to gain strong top line momentum.
We’ve already seen the movie where a firm slashes away the work force to boost profits and everything magically gets better afterward. In the case of Cisco though, this doesn’t address the firm’s inability to bump up top line growth. In our view, this recent action looks like a large ominous sign relative to the firm’s future that doesn’t give any investor much comfort. We rate Cisco Systems a PASS due to its lack of X-Factor catalysts, its failure to address its subpar growth numbers, and failing to compensate investors through meaningful dividends sine the firm’s stock has been range bound for a decade.
Lambs Buy Johnny Time
Investors want revenue growth not lamb shank. As far as we can tell investors haven’t been too concerned about profit margins compared to growth numbers. Investors have a justified concerned in relation to top line growth given that Cisco has shuttered Flip Video and lost 6.4% in global router sales in a space where it still holds the dominant position. The fact that archrival, Juniper Networks (NYSE:JNPR), gained ground in the same space just adds insult to injury. For John Chambers, CEO of Cisco, this probably didn’t help him sleep very well at night so this probably when he came up with the brilliant plan to create a smoke screen by cutting the workforce.
The recent accusation from the top that the firm is bloated doesn’t hold much water with us given that operating margins never dropped below 20% even during the global recession. In addition, we looked at over 10 quarters worth of data for COGS and operating expenses and didn’t see any anything that illustrated the firm was much heavier over this period of time. Yet for some reason Johnny (AKA:Mr. Chambers) has decided to purge part of the firm’s workforce regardless. The dots aren’t quiet connecting in our view but captain Johnny thinks otherwise so its time to send the lambs off to slaughter. We think his goal here was really just to buy more time and hopefully save his own you know what.
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Now some may not know this but Mr. Chambers has been CEO of the firm since 1995. This means that he’s gone through two recessions with the firm and by default in some form the one who made the firm fat. Even better he has taken no real accountability on the matter. Is he saying that with roughly 16 years of experience managing the firm it took him almost 3 years to arrive at this conclusion? If so, this sounds like a poor excuse at best. In our view you don’t blame the sailors when the ship starts to sink, you blame the captain because he’s the one in command.
Will this recent culling action satisfy investors? Perhaps it will satisfy some but probably not most. Investors want to know that Cisco’s stock is actually going to start going somewhere again after bouncing around in a range for the last decade. Mr. Chambers understands that investors ultimately want top line growth and nothing else will satisfy them over the long term. When the smoke clears if this CEO doesn’t have a real solution to what ails the firm he’ll likely be the next one up on the chopping block.
The Headless Chicken Strategy
Many analysts have voiced their concerns that the firm is lacking focus in relation to growth and that Cisco has failed to address this issue so far. In our view Cisco currently has no X-Factor catalysts moving forward. Why do we think this? Any firm that believes it’s about to witness a substantial pick up in growth isn’t about to gut the workforce right before. We think that this recent action illustrates management’s true perception on the firm. In that the firm has become dated relative to innovation and that it’s happy to continue playing king of the hill where it’s already dominating.
The firm for whatever reason seems to be lacking fresh ideas and this may be due to management itself but that’s almost impossible to confirm. Still, lacking a hot X-Factor means the firm has no justifiable reason to go higher beyond the fact that its a cheap stock relative to the cash it generates. To us that sounds like Microsoft (NASDAQ:MSFT) … just another cash cow who’s stock is going nowhere fast but at least they pay a dividend.
Call to Action:
Until Cisco Systems gets its act together and starts focusing on how to grow the top line better we don’t see a point in putting money into the name. A tech firm with $27B in cash has a real problem if it can’t develop and execute great new ideas. After all it’s not like the firm is short on cash or perhaps even ideas. Either way cutting staff isn’t innovative instead it’s a last ditch resort when everything else has failed.
We don’t think the stock is going to collapse to zero or that the company is bad but there is a huge difference between a good company and good stock. Right now Cisco is a pretty good company but a crummy stock. Confusing the two is a dangerous game we see being played here.