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5/14/2010
10:46 AM
Bob Evans
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Cisco Stock: 4 Reasons It's Not Reflecting Blowout Quarter

CEO John Chambers says Cisco just had "probably the strongest quarter in our history" and given that storied history, that's a remarkable perspective. But investors have been pooh-poohing Cisco shares, which have actually even fallen a bit: do they know something CIOs should know? Here are four possible explanations from a great equity-research firm.

CEO John Chambers says Cisco just had "probably the strongest quarter in our history" and given that storied history, that's a remarkable perspective. But investors have been pooh-poohing Cisco shares, which have actually even fallen a bit: do they know something CIOs should know? Here are four possible explanations from a great equity-research firm.Ockham Research has a strong following among traders and I've found their analyses of tech-company strengths and weaknesses to be unusually insightful. Ockham has posted a brief analysis of the Cisco disconnect on seekingalpha.com, and I've culled out four factors Ockham cites as potential causes for the mismatch between Cisco's blowout performance and the lousy stock performance since then.

Bear in mind that Ockham is not taking the position that these are in fact the causes for the disconnect; rather, these four points represent their best effort to make some sense out of a situation that seems to make no sense. If it seems that the analysis is stretching a bit thin, that's more a reflection of the bizarre share performance than it is of Ockham's analytical capabilities.

1) "Perhaps the earnings whispers are to blame for the sell-off." Yes, possible-but coming off "the strongest quarter in our history," Cisco is also predicting huge growth for its next quarter, matching or significantly ahead of analysts' projections.

2) "[Perhaps] . . . positive earnings surprises from other tech bellwethers made this report just par for the course." Yes, some other tech companies have shown strong results, but none has matched Cisco's 27% revenue growth and a comparable spike in profits.

3) "The quarter did include an extra 14th week, a rarity that may provide one possible explanation for the strong results." Right, except for that equally bullish projection for the next quarter, which has no extra 14th week.

4) "The question investors must ask themselves is, does this best in class company not command a premium?" Perhaps some investors feel it doesn't-but in a market that's been desperately seeking growth, Cisco's performance will be hard for competitors to match let alone exceed.

Ockham's diligent attempt to find some chinks in the Cisco armor reveals just how strong the company's performance actually was, and it also sheds some very encouraging light on the still-murky issue of whether CIO-level tech spending is back to encouraging levels.

As Ockham said, "Growth has returned to Cisco and, as its CEO will attest, they are hitting on all cylinders. . . . There is no doubt Cisco is a cash generating machine right now and operations appear only to be getting stronger as they provide the pipes for the Internet."

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