Cisco's Continuing Woes

I recently exchanged some email missives with an old friend who escaped the collapsing financial sector for the decidedly greener fields of the California technology sector. He was glum over that day's equity price performance of his new firm, Cisco.

I didn't think much of it, until I read, later that day, of Cisco CEO John Chambers' downbeat outlook and the lackluster quarterly earnings report.

I wrote this post last November, on the occasion of the company's and Chamber's last sobering, disappointing quarterly outlook and earnings report.

"However, a much more revealing chart is the next one, spanning the public life of the firm. It produced shareholder value so fast in its early years that comparisons with the index are really pointless. But it's easy to see that, like Microsoft, Cisco has really 'enjoyed,' or, more pointedly, its shareholders have not, a lost decade. From its peak at the peak of the technology bubble in 2000, Cisco slid dramatically and really never substantially recovered.



I have checked my own records, and do not find evidence of the firm in any of my portfolios after early 2000. Between its dismal total return performance, relative to better-performing firms, and, I expect, slowed revenue growth, the firm joined the list I mentioned earlier in the post. Those technology firms whose charmed life of meteoric total return and revenue growth has slipped into history, almost certainly never to return.


Thus my amazement that pundits still put so much emphasis on the firm's every move. The information is clearly available for all to see- Cisco hasn't been a consistently superior performer worthy of long term holding for a decade. You'd have to be a market timer to have earned significant gains by owning the firm during that period. And if you simply bought and held, you'd be a big loser."



The price chart for Cisco, Dell, Intel, Microsoft and the S&P500 Index which appears at the beginning of this post bears out my contention.
 
More surprisingly, Thursday, on CNBC, one pundit was actually arguing that it's time for Chambers to find a new job. And whereas Microsoft is usually given a magical pass for its lost decade, Cisco doesn't seem to merit the same kid glove treatment.
 
A Wall Street Journal article in the Heard On The Street column matter of factly notes that the switch market, which Cisco rode to success a decade ago, has matured and become much more competitive. Revenues and margins are down. Like so many other technology firms have experienced, it appears that Cisco's main engine of profitable growth has flamed out, or settled down to a constant, slow burn, with no similar product/market to replace its earlier performance.
 
John Chambers and Cisco, meet Joseph Schumpeter's world of competitive, dynamic capitalism. Cisco hasn't been selected for my equity portfolios in at least a decade. Like the other firms I included in the price chart- Dell, Intel and Microsoft- all were once profitable contributors to earlier portfolios. But, once growth ebbed and returns came back down to earth, they were jettisoned, never to reappear.

Cisco's Troubles- Are They Really Surprising?

Today's Wall Street Journal has a piece calling attention- apparently in surprise- to Cisco's latest earnings disappointment. The article cites slowing revenue growth at the networking gear giant.

 Frankly, like a procession of formerly-consistently superior performing technology icons before it, including JDS Uniphase, Cognizant Technologies, Dell, Microsoft, and Intel, Cisco has been a total return has-been for quite some time.

The nearby five-year price chart for Cisco and the S&P500 Index show the firm has outperformed the latter over the period. But, upon close inspection, it's evident that the outperformance has really been in the brief period of the equity market crash between late 2008 and early 2009. Before and after, the performance patterns were similar, with Cisco declining to nearly the index's level by fall of 2009.

However, a much more revealing chart is the next one, spanning the public life of the firm. It produced shareholder value so fast in its early years that comparisons with the index are really pointless. But it's easy to see that, like Microsoft, Cisco has really 'enjoyed,' or, more pointedly, its shareholders have not, a lost decade. From its peak at the peak of the technology bubble in 2000, Cisco slid dramatically and really never substantially recovered.

I have checked my own records, and do not find evidence of the firm in any of my portfolios after early 2000. Between its dismal total return performance, relative to better-performing firms, and, I expect, slowed revenue growth, the firm joined the list I mentioned earlier in the post. Those technology firms whose charmed life of meteoric total return and revenue growth has slipped into history, almost certainly never to return.

Thus my amazement that pundits still put so much emphasis on the firm's every move. The information is clearly available for all to see- Cisco hasn't been a consistently superior performer worthy of long term holding for a decade. You'd have to be a market timer to have earned significant gains by owning the firm during that period. And if you simply bought and held, you'd be a big loser.

But, I guess analysts have to create interest and drama in order to be noticed and, well, get paid. As for me, I won't be expecting Cisco to be returning to its former, attractive performance profile of the 1990s, when it hasn't managed to do so in the intervening decade.

Why I'm Sick of John Chambers, Cisco CEO

John Chambers has enjoyed considerable exposure, some might say over-exposure, this week.

First, he was the subject of a warm and fuzzy, fawning interview by The Wall Street Journal on Tuesday. Gliding over Cisco's meltdown during the tech bubble-bursting and subsequent disastrous performance, the Journal had the sense of an advertising-driven entity to stay away from even remotely being perceived as focusing on that period in the company's past.

Instead, it lionized Chambers and his firm for its many acquisitions and prior growth. Then, it allowed the Cisco CEO to claim that his firm was about to march into consumer electronics, showing everyone 'how it's done,' so to speak.

Chambers' 'five tips' for running a technology firm smack of managerial basics: catch market transitions in a timely manner; offer differentiated products in new markets; focus on customer needs and wants; have good leaders in your firm, and; innovate.

Gee, thanks John. I'd never had guessed at any of those key strengths of any successful growth firm.

But that's not the best of John Chambers this week.

I caught his appearance one morning on CNBC. As a CEO, the on-air-head anchors naturally expected Chambers to have credible answers on questions like the sub-prime mortgage market turmoil. So they asked him for his opinion.

To my horror, unlike President Bush, who deflected an economic question at his press conference this week with the clear notice that he is not a trained economist, Chambers went ahead and pompously pontificated on the condition of that highly esoteric debt market.

Thanks again, John. Why bother listening to observers with real market experience who might have informed insights on this recent area of financial concern? Instead, let's go ask someone from an entirely different sector.

I'm rapidly tiring of seeing Chambers pop up everywhere. With me, at least, his credibility and my respect for him took a big hit when he failed to simply pass on the sub-prime mortgage question, noting that he has absolutely no basis to make any informed remarks not available from any other observer also not active in that market.

For Cisco's shareholders' sakes, let's hope Chambers has better judgment running their firm than he does talking about management practicies and debt markets.

As the Yahoo-sourced chart nearby shows, while Cisco has outperformed the S&P over the past five years, this wasn't the case as recently as early last year. The firm's performance has been erratic, leveling off once again early this year, and sustaining a long period of decline during 2004 and 2005.