Cisco shares fall in heavy volume as analysts cut ratings

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Shares of Cisco Systems took a hit in early trading Wednesday as Wall Street analysts downgraded the stock and cut estimates based on the company's outlook for the next two quarters. Even amid the downgrades, however, many analysts reiterated that Cisco remained a good long-term bet.

Shares of the tech bellwether fell $3.50, almost 10 percent, to $32.18 in early trading. In the first hour of trading Wednesday, more than 54 million Cisco shares exchanged hands.

Cisco (Nasdaq: CSCO) controls more than two-thirds of the global market for routers and switches that link networks and power the Internet. The company has also begun to move into the optical telecommunication market dominated by companies such as Nortel (NYSE: NT) and Lucent (NYSE: LU).

After market close Tuesday, the Internet equipment giant fell short of analysts' estimates with earnings of 18 cents a share on sales of $6.75 billion. The company predicted flat revenue for the third and fourth quarters.

Cisco officials said fiscal 2001 revenue growth is now projected to be in the "40 percent range," down from previous guidance of 50 to 60 percent revenue growth.

The fallout from the Cisco miss was felt across the sector. Shares of competitor Juniper Networks (Nasdaq: JNPR) were off $2.56 to $102.18, JDS Uniphase (Nasdaq: JDSU) fell $1.69 to $50.13 and Ciena (Nasdaq: CIEN) lost $1.69 to $81.

Analysts responded with a wave of downgrades and estimate reductions.

At Morgan Stanley, analyst Christopher Stix was among the most critical of Cisco's earnings. The analyst downgraded the stock to "neutral" from "strong buy," while cutting estimates for 2001 and 2002 for the third time in the last month.

For Stix, the combination of decreased earnings visibility, general economic weakness, slow carrier capital spending growth, legacy product growth and employee retention problems created serious short-term issues for Cisco. The analyst added that he believed the stock was unlikely to post gains for the next three to six months.

The analyst said that much uncertainty remained. "If there is an upturn in the economy and capex growth is reinvigorated, then the company could return to 30 percent annual growth rates. The problem is, we don't know, and they don't know," Stix wrote.

Analyst Steve Kamman at CIBC Oppenheimer, who has a "hold" rating on the stock, summed up the consensus view on Wall Street.

"We had expected a downturn but admit that it arrived with more severity and speed than expected," Kamman wrote. The CIBC analyst deserves some credit, he bucked his peers with a negative report on Cisco last month. On the same day as Kamman's report, Cisco CEO John Chambers mentioned at an investment conference that the second quarter would be "more challenging."

Kamman's report, coupled with Chambers comments, resulted in 212 million Cisco exchanging hands Jan. 10.

At UBS Warburg, the company was reiterated at a "buy" rating, but the 12-month price target was slashed to $40 from $60 and 2002 earnings estimates were lowered. Lehman Brothers, analyst Tim Luke dropped the company to "buy" from "strong buy," cut the price target to $36 from $45, and reduced estimates for fiscal 2001.

Amid all the gloom and doom, there were many analysts holding out hope for a silver lining for investors -- the worst may be over.

Analyst Michael E. Ching at Merrill Lynch held out a positive long-term view on the stock, while lowering estimates for fiscal 2001 and 2002.

"Despite this disappointing performance, Cisco is still growing faster than most of its peers, and remains an attractive long-term investment, in our view," Ching wrote in a research note. The stock was maintained at a long term "buy" rating.

Ching said Cisco's weakness derived from lower capital spending at emerging service providers. Ching said that Cisco itself has added to some of these issues by reducing its commitment to vendor financing.

In a report, Salomon Smith Barney analyst B. Alexander Henderson said investors should buy shares of the networking giant.

"Cisco, as feared, sharply lowers guidance cutting revenue targets and sharply lowering margin expectations," said Henderson in a research note.

"However, we think this puts Cisco within a week of hitting its trough valuation in this cycle and accordingly we are strongly recommending investors buy Cisco on the current weakness."

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