Why Cisco May Be Just Good Enough & Why RRSat Has It So Good

In my view, the one factor that will have the most impact, both in the immediate future and over the longer term, on interest rates, forecasts from Cisco (CSCO) and other companies, and share prices from the US to China, and on almost every item of economic data, either directly or indirectly, is the price of oil.

The good news is that oil prices have now beaten a hasty retreat, after failing to break through the $150 a barrel level, and from there to the doomsday scenario of $200 a barrel that the experts had been predicting.

The bad news is that in Israel, the ruling Kadima party will be holding its primaries in September, and that our incumbent Minister of Transport Shaul Mofaz has developed something of a penchant for sabre rattling with his talk of air strikes on Iran every time he ventures overseas. It would appear that Mofaz's rhetoric in Washington has been taken far more seriously than what he says here in Kiryat Ono, as was the case last Friday when he appeared to have single-handedly halted the slide in oil prices, sparking an increase of $5 instead. And here was I, thinking in my innocence, that as transport minister he would rather see gas prices down than up.

No joy yet from Cisco

The expectations of Cisco Systems Inc. (CSCO), as it prepares to unveil its latest quarterly results today, are low. When company CEO John Chambers warned, in November last year, that the credit crunch could filter through to his orders backlog, the share was at $34, the highest it has been since emerging from the telecom crisis at the beginning of the decade.

It is currently $12 lower, which means that it has suffered a 35% cut in value because of the slowdown. Cisco has maintained its growth despite the crisis, and it is expected to report quarterly sales of $10.3 billion, up 9.4% over the corresponding quarter, with earnings per share climbing 6.8% to $0.39.

The quarter ending July is the last in Cisco's fiscal year, but the market is not expecting Chambers to issue full-year guidance through July 2009 at the company's conference call today, but solely for the current quarter ending October 31. All the analysts expect the company's full-year growth guidance to be around 8-10%.

Chambers has been quoted in recent weeks as saying that on the basis of his talks with leading customers worldwide, he now believes that the recovery he thought most of them would be seeing by the end of 2008, will not happen before the second half of 2009. As a consequence, he may well announce today that Cisco will not return to year-on-year growth in the region of 15-17% until its next fiscal year, July 2009-2010, a forecast that will remain true to the overall guidance he gave at the onset of the credit crunch. I believe that this has already been priced into the price of the share as well, and I find it hard to envisage it falling strongly, if that indeed is the worst case scenario for tomorrow.

There isn't an analyst on the market who expects Chambers to announce that the crisis is almost over when he addresses investors later today, but if it turns out that everybody got it wrong and Chambers does indeed declare that the turnaround is almost in sight, the share could soar by almost 20% tomorrow, just like its rival Juniper Networks (JNPR) did following its own quarterly results ten days ago.

Juniper, it should be remembered, has quarterly sales that are one tenth of those of Cisco, and in addition, its sales mix is slanted much more towards telecommunications providers, which are continuing to invest billions of dollars in broadband infrastructure, despite the crisis. Cisco's principal weak point is the fall in investment by large enterprises, especially banks, primarily in the US and Europe.

Reaching for the sky with RRsat

One Israeli company that will be working around the clock during the upcoming Olympic Games in Beijing is satellite content distributor RRsat Global Communications Network Ltd. (RRST), which I have in my portfolio, tracked by "Globes". I recently visited the company's teleport site at Reem Junction in southern Israel, and it was obvious that Olympic games or not, they work around the clock there transmitting television channels of all types and in all languages to subscribers across the globe, through the company's network of satellite uplinks, fiber optic cables, and IPTV.

During the second quarter RRsat closed the acquisition of the Hawley Teleport in Pike County Pennsylvania from Skynet Satellite Corporation, and it will complete the acquisition from Bezeq (TASE: BZEQ) of its satellites in the Elah Valley by the end of the year.

As far as the Olympic Games themselves are concerned, RRsat will relay live coverage to Europe and to Israel for the HOT sports channels and the YES HD channel, which will also broadcast competitions recorded in high-definition HDTV format.

RRsat reported another excellent quarter with strong growth last week, and raised its full-year guidance. In response, the share ended July with a 28% return, but at its current price of $13.50, it is still half its September 2007 high. The share lost one fifth of its value back in May after the company reported a 3% drop in gross profit for the first quarter, largely because of the shekel-dollar exchange rate, and it now appears that this was a one-time occurrence that has long since been forgotten.

RRsat reported sales of more than $19 million in the second quarter, and earnings per share of more than $0.20, both of which were higher than the consensus estimate. This represents an annualized increase of 30% and a 7% increase over the first quarter. The company also raised its full-year sales guidance by $2 million to $78 million, following the growth in its orders backlog to $174 million. Management noted in its conference call that as of present, it had already received final orders for delivery totaling $36 million out of its projected $40 million backlog for the second half of 2008.

Over the next three years RRsat will benefit from three prevailing trends in broadcasting. One is the increasing tendency among television companies to contract out, for financial reasons, the execution of their broadcasting schedule. Secondly there is the switch to HDTV broadcasts for which companies charge more but which is increasing the potential market for RRsat, since the same channels are continuing to be aired at the normal resolution as well. The third trend is the intensifying rivalry between cable companies and telecoms carriers which are now offering IPTV broadcasts, with both sides vying for business by expanding their content offerings even further, a move that will also increase RRsat's potential market.

Disclosure: None

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on SeekingAlpha with full permission.