I've been an advocate of Cisco (CSCO) as a value play for a couple years now. It hasn't always worked out very well, as cost cuts by CEO John Chambers and missed earnings were interpreted negatively by the market. Now that those same cost cuts are starting to pay dividends (pun intended), Cisco has suddenly become a very attractive choice; I bet I've received more positive Seeking Alpha article notifications on Cisco in the last two months than I had in the previous six.
So, this new interest begs the question: Is the market right, now? Is Cisco suddenly the value play I thought it was two years ago? If so, what has changed about the business or the market that would make Cisco such a popular target? We all know that their earnings have been better in recent quarters, despite softening government sector spending. We also know that John Chambers is still the head of this networking albatross, as he has been for the last seventeen years. You can argue about margins, market share and technology all you want, but this article will take a step back and ask why Cisco should be considered a buy now vs. 12 months ago.
Chambers is still the boss
The thing that I find most intriguing about the sudden positivity being heaped on Chambers is that he was in charge when Cisco became bloated in the first place. He was there when Cisco was riding high during the dot com boom. He's also been at the head of the company as more agile competitors have come in and occupied/fortified themselves within niches in the networking sector (I see you, JNPR, ARUN, RVBD).
I'm forcing myself to ask, does Chambers deserve the credit for this turnaround if he created the mess in the first place? If parents let their child become obese as a result of poor diet and lack of discipline, should they receive heaps of praise when the kid drops a few pounds? Cisco has been under the leadership and tutelage of Chambers, and I'm not sure he deserves credit for cutting costs that were added/sustained under his leadership. I need to see something else from him to know that he truly "gets" it.
Where is the innovation?
The program to nurture innovation within the company is cute, but it will only be value add if it works. Innovation is not a corporate initiative, it's a pervasive frame of mind that impacts every decision made within an organization. You don't get there just from a couple of incentive programs that are "encouraged" by the managers of the company. To hear forums/message boards talk of it, you would think that Cisco was rampant with incompetent managers that squash any sort of innovation before it gets any momentum. We'll see if these programs they have built will yield the results he needs to turn these sort of rumors around.
Bain of Cisco
A lot of people have made a big deal out of Bain Capital's investment in Cisco (which I believe is about 5%). They talk about how Bain is making Cisco outsource jobs, forcing management into poor decisions, etc. Meanwhile, there are murmurs about Chambers being uncooperative towards challengers to his authority. He's been accused of having his handymen and buddies on the large board of Cisco to help keep him secure. There have also been reports recently that Chamber has methodically removed anyone who may have had ambitions for becoming the firm's CEO, effectively securing his position despite any shortcoming in stock performance.
So, who is really the bane of Cisco? Is it a private investor who is trying to cut costs or a CEO allergic to vocal, intelligent challengers amongst his board and officer group?
The issue with Cisco over the past couple years has been the lack of a catalyst to break through the negative cloud that hung around the company. I wrote that I believed the cost cuts could do just that, and although it took longer than I anticipated, I believe they have. The question remaining is whether these cuts and the change in policy at Cisco will be enough to keep the momentum moving forward. The market is fickle, and I don't think CSCO can handle another period of stagnation, no matter the fundamental value their financial statements might show. The issue I'm beginning to have, however, is a sneaking suspicion that Chambers may not be the right leader to take Cisco where it needs to go. Good leaders want the best people around them, not just yes men and women. Is Cisco going to turn it around based on some cost cuts when it is led by the same hand it has been, or are we looking at another ten years of underperformance?
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