By Carl HoweToday's Wall Street Journal took a look at Cisco (ticker: CSCO) today, noting that investors can't figure out if it is a growth or a value stock. The comments are telling:
Cisco's growth prospects aren't sexy enough for the former and the stock, trading at nearly 17 times its expected per-share profits for 2006, still isn't cheap enough to wow the latter.
"We have looked at it because it's come down so much," says David Dreman, chairman and chief investment officer at Dreman Value Management in Jersey City, N.J. "But there's not enough growth for a growth investor and not really enough value to tempt a value investor."
So the big question is, what's the benchmark by which we should measure Cisco's earnings report due out at the close of business today? Should we be looking at its growth or its value?
Investors are flummoxed by the company because they continue to think of it as the soup to nuts network manufacturer for large enterprises and carriers. But I believe the company has a new role defined by its purchase of Scientific Atlanta: it is becoming the soup to nuts network provider for consumers through the multifunction home cable box. Now that's a big change for a company to make. But others have successfully navigated that change; there's no reason Cisco can't.
Motorola is probably the best example of a firm that has made this transition. Motorola at one time focused largely on business needs, then transitioned to consumer markets with high-fashion cell phones like the RAZR and PEBL that convey style and fashion. But Motorola still has a lot of its business selling infrastructure systems to cell companies just as Cisco will do with networking companies, so the companies have many similarities.
Comparing the financial benchmarks for the two firms provides a bit of insight into what Cisco's future might hold.
|Revenue||$25.4 billion||$36.8 billion|
|Quarterly revenue growth year-over-year||10%||18%|
|Quarterly earnings growth
|Cash||$13.5 billion||$14.8 billion|
The issue facing Cisco is that its focus on consumers could dramatically hurt its currently fat profit margins. That means that it will need to find more revenue to keep shareholders happy. If the company isn't currently contacting every cable company on the planet and offering to fly them to San Jose or Atlanta to meet, they should be. In the cable industry, size does matter.
However, if we look at consumers more broadly, Cisco has an amazing opportunity with consumers. All the current visions of the digital home assume some type of digital hub box that helps distribute digital TV shows, broadband Internet connectivity, and a wide variety of Internet services. Just as Apple can deliver an end-to-end music service linking iTunes on the Internet to the iPod in a consumer's hands, so Cisco has the potential to offer an end-to-end networking infrastructure from the data center to the consumer's house.
As cable boxes, high-definition digital TVS, PC media centers, wireless hubs, media extenders, and network connections permeate our homes, we at some point will want one company to guarantee it will all work. Cisco is one of the few companies that can offer a provider like Comcast or Time Warner a single source for all the pieces needed for the soup-to-nuts digital home. If it makes the pitch that simply to the cable companies and telcos worldwide, Cisco will become a growth stock again -- big time.