Cisco layoffs a bad omen

News that Cisco will cut jobs is taken as a sign that things are much worse than anyone had expected--in the United States and overseas.

3 min read
News that Cisco will cut jobs was taken as a sign that things are much worse than anyone had expected--in the United States and overseas.

Analysts slashed their targets for the network-equipment maker and said the stock's price may drop more.

The job reductions are "the antithesis of (Cisco's) corporate culture," said ABN AMRO analyst Kenneth Leon. "We believe further force reductions would only occur if market conditions get worse from here," he added. Leon lowered his price target to $30 from $40 and slashed earnings targets Monday while maintaining an "add" rating.

CEO John Chambers had lamented having to cut jobs earlier in his career at other companies. These are the first layoffs during his term at Cisco--and the first in 17 years.

Late Friday, Cisco said that it would cut its full-time work force by as much as 11 percent during the rest of its fiscal year. The company said it was seeing U.S. problems expanding to other parts of the world and that the slowdown in capital spending could extend beyond two quarters.

Cisco's layoffs may indeed be the initial signs of the U.S. slowdown expanding to other parts of the world, according to analysts.

Merrill Lynch's Michael Ching, who kept his "accumulate" rating, said the cost-cutting measures were widely expected given the slowdown and predicted that investors would focus on related comments by management.

Ching expressed concern about business trends in Europe, which had previously been one of the bright spots for Cisco. Europe represented 25 percent of sales in fiscal 2000.

Trouble spreading?
The news may also signal that the company's internal troubles are spreading into its enterprise segment. According to Leon, market conditions are weaker across all segments, but his largest downward revisions were in enterprise routers and switches, an area from which Cisco gets 65 percent to 70 percent of total sales.

Leon now predicts that fiscal 2001 earnings will be 63 cents a share, down from a previous 67 cents, and fiscal 2002 earnings will be 72 cents a share, down from 88 cents a share. First Call's consensus had been for 64 cents and 98 cents a share.

Most other analysts slashed their estimates to below previous forecasts and First Call's consensus.

Ching also cut earnings numbers and said he expected sales to decline by 10 percent in the April quarter to $6.1 billion, down from his original estimate of $6.6 billion. First Call had been predicting $6.53 million.

Morgan Stanley analyst Christopher Stix, who already had the Street low on estimates, cut them again, for the fifth time in 10 weeks. He maintained a "neutral" rating and saw the company's stock approaching a trough of $11 to $14 a share.

Analysts weren't upbeat on the path of the stock either.

"Our financial model is consistent with a U-shape market scenario for weaker results in most of calendar 2001 and expected recovery in (the first half of calendar 2002)," Leon said.

Other more bearish analysts didn't even see a bottom in sight.

"Although Cisco's lowered stock price may be seductive to investors, we believe that there is still near term downside to the stock," said Robertson Stephens analyst Paul Johnson, who cut his rating on the stock to "market performer" from long-term "attractive" and called the company "a shadow of its former self."

"Note that the company's negative commentary comes only 5 weeks into their quarter," Stix added, a sign that the worst may be yet to come.