Boring Portfolio Report
Wednesday, January 29, 1997
by Greg Markus (MF Boring)
ANN ARBOR, Mich. (Jan. 29) -- The Dow broke a string of five losing sessions, rising 85 points on Wednesday. The S&P 500 advanced just about one percent, but the Nasdaq surrendered most of its morning gains to finish higher by less than a point.
As for the Boring Portfolio, it was a fairly uneventful day except for a $2 7/8 slide in shares of Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> on mega-volume of 16.4 million shares.
There is no new news I've been able to locate that might account for the drop. Perhaps memories of recent sell-offs in Cascade Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %> and, to a lesser degree, Foolfolio holding 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> inspired some folks (including what appears to have been at least one large institution) to lock in their winnings in advance of Cisco's quarterly earnings report next Tuesday.
If so, the sentiment would be understandable -- particularly given the announcement earlier this week by the aforementioned Cascade and 3Com, along with IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, that they are banding together to chip away at Cisco's domination of the networking industry. As you may recall, the trio's strategy involves IP, or Internet protocol, switching -- a technology developed by tiny Ipsilon Networks. (By the way, that adjective proceeds Ipsilon's name so consistently in the press that the company may as well consider changing its name to Tiny Ipsilon, Inc.)
Other network plumbing-supply firms have staked out their own positions in the battle to stamp out the networking router, 80% of which carry a Cisco label. Challengers include MRV Communications Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRVC)") else Response.Write("(Nasdaq: MRVC)") end if %>, Netherlands-based Madge Networks NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MADGF)") else Response.Write("(Nasdaq: MADGF)") end if %>, and Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>.
Although the significance of the threat to Cisco from MRVC and Madge is arguable, Ascend has undeniably scored some significant wins over Cisco among Internet Service Providers. For example, PSINet recently chose Ascend's GRF 400 device (which combines aspects of routing and switching) in place of 20 or so Cisco routers at a key position in PSINet's network backbone.
So is Cisco in trouble?
That depends on what one means by "trouble."
If the question is, Will Cisco be able to enjoy forever its 80% dominance over internetworking infrastructure and its near-monopoly gross margins? -- well, pretty clearly the answer is: It will not.
On the other hand, if the question is, Will Cisco, despite its enormous size, nevertheless be able to grow consistently at an annual rate that at least matches the 30 to 50 percent yearly growth rate of its industry -- the answer of every one of the nearly three dozen analysts who follow the company is: Oh, yes.
For example, Therese Murphy, an analyst at Smith Barney, said the other day that she believes the newly announced alliance will have some success, but that given the massive installed base of Cisco products, "the lion's share of the market will go to Cisco."
After all, Cisco has rapidly transformed itself over the past year into much more than a router company. Through a combination of massive in-house R&D and a breathtaking string of acquisitions, Cisco has positioned itself as #1 or #2 in market share for every major piece of equipment the connects computers to Internets and corporate intranets. It's left acoustic modems to US Robotics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %> and others -- at least so far.
Indeed, in some ways Cisco's most valuable resource is not hardware but software. Cisco's proprietary IOS software in the lingua franca of the Internet. Cisco has even announced recently that they intend to market el cheapo client server setups using Iomega Zip drives as components, while at the higher end of the market, the company just established an alliance of its own, with some outfit called Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>.
Also, as the latest issue of Barron's reports, Cisco intends to bring a battleship-class switch, code-named "Popeye," to market later this year to sell to phone companies desperate to build up their infrastructure. I don't know the origin of the code name, but I expect the new switches will sell at eye-popping prices.
Wait! There's more.
Inter@ctive Week reports that Cisco is about to go into the equipment leasing business. According to the story, Cisco will use $100-200 million in cash -- pocket change for Cisco -- to form a "captive leasing" company, so-called because it will do business only with Cisco and its customers.
Under the program, customers could be able to lease Cisco equipment from the finance arm, which would in turn buy the routers and switches outright from the parent company. Cisco is also reportedly working out the details of a smaller "private label" leasing program, under which it will contract with four or five outside leasing companies, who will in turn offer favorable lease rates to Cisco customers.
Wow. Cisco not only makes the equipment. It's now gearing up to buy the equipment from itself -- and turn a profit on the arrangement. That gives a whole new meaning to the term "internetworked."
Today's Numbers
Stock Change Bid -------------------- BGP + 3/4 38.00 CSL - 1/2 30.38 CSCO -2 7/8 65.88 GNT + 3/8 38.88 ORCL + 1/8 37.63 OXHP - 1/2 51.50 PMSI + 1/8 11.63 SLR + 1/4 61.00 TDW - 3/4 46.75
Day Month Year History
BORING -0.20% 1.46% 1.46% 16.75%
S&P 500 +0.98% 4.29% 4.29% 24.27%
NASDAQ: +0.06% 4.97% 4.97% 30.19%
Rec'd # Security In At Now Change
2/28/96 200 Borders Gr 22.51 38.00 68.80%
2/2/96 200 Green Tree 30.39 38.88 27.93%
6/26/96 100 Cisco Syst 53.90 65.88 22.22%
3/8/96 400 Prime Medi 10.07 11.63 15.46%
8/13/96 200 Carlisle C 26.32 30.38 15.38%
10/15/96 100 Solectron 54.52 61.00 11.88%
5/24/96 100 Oxford Hea 48.02 51.50 7.24%
12/23/96 100 Tidewater 46.52 46.75 0.48%
11/21/96 100 Oracle Cor 48.65 37.63 -22.66%
Rec'd # Security In At Value Change
2/28/96 200 Borders Gr 4502.49 7600.00 $3097.51
2/2/96 200 Green Tree 6077.49 7775.00 $1697.51
6/26/96 100 Cisco Syst 5389.99 6587.50 $1197.51
8/13/96 200 Carlisle C 5264.99 6075.00 $810.01
10/15/96 100 Solectron 5452.49 6100.00 $647.51
3/8/96 400 Prime Medi 4027.49 4650.00 $622.51
5/24/96 100 Oxford Hea 4802.49 5150.00 $347.51
12/23/96 100 Tidewater 4652.49 4675.00 $22.51
11/21/96 100 Oracle Cor 4864.99 3762.50 -$1102.49
CASH $5999.08
TOTAL $58374.08