Networking
Zombies:
Return from the Dead
by Randy Befumo
(TMF Templr)
ALEXANDRIA, VA, (May 2, 1997)/FoolWire/ -- Networking companies received
a boost today from Merrill Lynch analyst Joe Bellace. Commenting on CISCO
SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>, Bellace stated that the outlook for Cisco's new
products like its Big Fast Router (BFR) and tag switching gear appeared "quite
favorable." Even more surprising, Bellace went out on a limb regarding Cisco's
third quarter estimates, stating that when the company reports next week
it will notch in EPS of $0.53 to $0.54, compared to current consensus
expectations of $0.52 per share.
Rumors have been rife in Silicon Valley for weeks now that Cisco would not
make its third quarter numbers because of weakness in corporate demand in
the quarter. At a recent investor's conference in Boston, newsletter author
Michael Murphy went as far as to say his sources were telling him the San
Jose-based networking giant could miss estimates by up to $0.15 per share.
With all eyes focused on problems at 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> after INTEL
CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> introduced two competitive products, investors were
already prepared for the worst. Bellace's comments fly in the face of this
looming negativity and represent the major positive stance on Cisco since
the networking slaughter two weeks ago.
Bellace's comments today combined with positive vibes from the Hambrecht
& Quist Technology Conference held this week have allowed networking
stocks to enjoy a solid recovery from the lows of two weeks ago. Concerns
about continued strong profit growth have been allayed by a growing body
of information that suggests earnings remain intact. Bellace raised his 1997
estimates for Cisco Systems to $2.07 per share from $2.04, maintaining that
1998 earnings would fall somewhere between $2.65 and $2.75. These numbers
put Cisco at roughly 21 times forward earnings, still toward the low end
of its historic 18 to 30 range.
Not to be outdone, ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> Chief Financial
Officer Robert Dahl also hit the wires yesterday with an affirmation of the
company's estimates for the current year. Dahl said Ascend would earn somewhere
between $1.60 and $1.70 per share in fiscal 1997, well above the consensus
estimates of $1.59 per share. Although sales of the new MAX TNT (The Next
Thing) switch went sluggish in February, the company stated when it released
its quarterly earnings last month that sales in March were robust and all
indications are that this has continued. Backlog in the quarter grew sequentially
and the company's book-to-bill ratio remained above 1:1, both supporting
a strong growth environment going forward.
Ascend sees revenues of $950 to $975 million for the full fiscal year, up
more than 70% over the prior year's total -- without counting the soon to
be completed merger with ATM switch manufacturer CASCADE COMMUNICATIONS
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %>. With this merger diluting earnings for the combined company
by roughly $0.05 to $0.10 per share according to statements made last quarter,
this puts the earnings for the combined entity at somewhere between $1.50
and $1.65 per share for 1997. A multiple of 30, less than one-half the rate
of growth, puts the stock at between $45 and $49 1/2 -- right where the market
has magically decided to price Ascend in the past few days. The large gap
between Ascend's valuation and the merger valuation of Cascade in Ascend
stock has narrowed from as much as 10% to a more moderate 2%.
Written off for dead two weeks ago, networking stocks appear to be back among
Wall Street's anointed this week -- on a trial basis. Although all of the
doom and gloom from industry analysts two weeks ago seemed overdone, it was
actually an e-mail from a reader on Apr. 23 complaining that networking stocks
were getting too much coverage in this column that confirmed for me, at least,
that people were way too negative.
April 22nd's Intel
versus 3Com cage match made many lose sight of the revolution remote access
is having on the public networks, prompting
April 23rd's "Remote Access
Primer." However, with valuations for these stocks becoming much more
rational in the past two weeks relative to their prospects, this reader can
now sleep soundly knowing that this will probably be the last networking
column for a little while. Small comfort when he could have initiated long-term
positions in Cisco in the mid-$40s, 3Com in the mid-$20s, and Ascend in the
low-$40s two weeks ago, but something nonetheless.
RELEVANT MESSAGE BOARDS:
3Com
Corp. (COMS) *
Ascend
Comm. (ASND) *
Cabletron
Systems (CS) *
Cascade
Comm. (CSCC) *
Cisco
Systems (CSCO) *
US
Robotics (USRX) |