Analyst reports: Bearish brokers berate Cisco

San Jose, Calif.-based Cisco supplies data networking products to the corporate enterprise and public wide-area service provider markets. It peddles routers, LAN switches and remote access concentrators to utilities, corporations, universities, governments and small to medium-sized businesses.

Cisco closed at $48.06 on Monday, down 5 percent from its closing price Friday. The reason for the company's decline: a tepid report from influential Lehman Brothers analysts Tim Luke and Mark Sue.

The duo maintained their "buy" rating but slashed their 12-month target price from $90 per share to $60 to $65 per share. Although they were generally upbeat about Cisco's management and future products, they were concerned about "a backdrop of potentially slowing growth" among the Internet and telecommunications providers that buy Cisco products.

"While Cisco remains our best positioned vendor with approximately 15 percent of sales to 'new economy' operators, uncertainty over capital expenditures...may continue to suppress its multiple," Luke and Sue wrote in a research report issued Monday morning.

The analysts now believe Cisco will trade around 65 times calendar-year 2001 earnings estimates of 85 cents to 90 cents per share. The most optimistic end of their revised range represents a 40.91 percent increase from the current stock price.

That may seem respectable relative to old-economy blue chips and stock market indexes. But it's a major slowdown for Cisco, whose investors are accustomed to some of the most giddy growth spurts on Wall Street.

For many investors, Cisco in the late '90s became a symbol of the unbridled enthusiasm of the new economy--along with a handful of other go-go stocks, such as Oracle, Sun Microsystems, Microsoft, Dell Computer and Intel.

From October 1997 to October 1998, Cisco stock increased roughly 60 percent. From October 1998 to October 1999 it increased about 125 percent. And in the five months from October 1999 to March 2000, just before the broader Wall Street drubbing that severely punished technology companies, Cisco stock surged 114 percent.

But investors soured on technology stocks in April, and most have not been able to rebound to their lofty valuations of late 1999. Cisco and other data networking providers remained to some degree above the broader fray of wrecked tech stocks, but their fortunes may be slipping.

Luke and Sue conducted a broad study of capital expenditures for Cisco and other networking clients, including Deutsche Telekom, AT&T and Qwest Communications. Based on the emerging trend, they surmised that capital expenditures would slow from the 30 percent growth rates earlier this year.

They blame the slowdown on financial difficulties among new-economy companies that were formed after the 1996 Telecommunications Act. Cisco's new-economy clients include HarvardNet, Digital Broadband and Intermedia.

For similar reasons, Lehman Brothers in recent weeks downgraded core communications equipment companies, including Nortel Networks, Ericsson, Nokia, Motorola and Netro. Luke and Sue said Cisco was in a stronger position than those companies and did not require a downgrade, but it needed a new target price.

"We recognize...that Cisco is entering a period of incremental uncertainty in the carrier market," Luke and Sue wrote. "This new target reflects our view that Cisco's leadership position in the communications equipment arena should enable the shares to continue to command a premium to its longer-term earnings growth rate of between 35 percent and 40 percent."