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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Oh No Cisco!
The Nasdaq composite index was crunched this morning after SG Cowen tweaked its numbers and changed its rating to a more cautious stance on data equipment gorilla Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. That sent Cisco down $8 15/16 to $46 13/16 -- back to spring levels on unusually high volume (not counting recent volatility) of 34.2 million shares at midday. Cowen's 1999 EPS estimate moves from $1.46 to $1.44 and the 2000 number was reduced from $1.85 to $1.76. This compares with the current mean 1999 and 2000 EPS estimates of $1.46 and $1.81. With a very high number of estimates in the mix and Cowen's former estimates not skewing the mean, this move signals a middle-of-the-pack (quantitatively) analyst setting off an early warning to the market. What looks like value based on estimates either represents good value or the estimates are off. That being the case, the market is very sensitive to indications of changes in the near-term business trend.
Cowen's thesis is based upon its belief that enterprise information technology budgets are being readjusted for calendar 1999. Cowen surveyed 22 companies and saw over one-third of the 11 financial services companies responding to its survey changing IT investment projections, which isn't surprising given job cutbacks in money center banks and investment-related financial services companies. Given that these are data-intensive companies and that 75% of Cisco's revenues come from large customers with highly complex networking needs, slower sales of less complex products hurts margins. Cowen also recently published a report linking 30% of changes in networking industry spending to changes in developed economy growth rates. With Europe and the U.S. slowing, Cowen's direct work surveying enterprises and its channel checks that have shown some pushouts evidence a strong thesis. In addition to this, Y2K spending was also named as a possible reason for a change in IT spending, which is another highly plausible idea. Potholes in capital budgets could be seen in the upcoming year as marginal IT disbursements shift from capital budgets to Y2K spending.
In all, this means that Cisco could be affected, and befitting its bellwether status, the change in outlook moved the rest of the flock this morning. Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> fell $3 5/16 to $36 7/8, a level the stock hasn't seen since the end of March, and 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> lost $1 1/2 to $28 5/8 this morning. Holding with the thesis that this is an IT budget issue and not a Cisco-centric issue, other IT capital goods companies took a hit this morning as well, with Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> down $4 3/8 to $58 5/16, Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> off $2 5/16 to $27 3/8, SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %> falling $2 11/16 to 31 1/16, PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> sliding $3 1/8 to $21 3/16, Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> down $3 1/8 to $22 7/8, and Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> softening $6 7/8 to $97 1/4. On the positive side, Cowen did release another note this morning saying carrier infrastructure spending plans continue to remain unchanged, albeit with less upside surprise potential. The report did mention "bullishness" on xDSL potential, which would necessitate increases in backbone capacity -- a positive for both Cisco and Ascend. Investors with exposure to these areas should pay attention to how the market responds to incremental information and how well the Cowen thesis stress tests in the market of ideas.
Greensboro, N.C.-based Vanguard Cellular Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VCELA)") else Response.Write("(Nasdaq: VCELA)") end if %> jumped $1 7/16 to $21 5/16 after the cellular phone systems operator announced it has agreed to be acquired by telecommunications giant AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> for about $1.5 billion in cash, stock, and assumed debt of $600 million. For each share they own, Vanguard shareholders will choose between $23 in cash or 0.3987 of an AT&T share, provided that 50% of the deal will be in cash while the other 50% will be in stock.
Life sciences company Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> recovered $7/8 to $52 7/8 after Bloomberg reported that the company's proposed $35 billion merger with drug maker American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> is still on track. Monsanto shares finished down $2 1/8, or 4%, to $52 Friday after falling as low as $46 1/4 amid speculation that the merger would be postponed or canceled.
Cancer drug maker Sequus Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEQU)") else Response.Write("(Nasdaq: SEQU)") end if %> surged $3 1/4, or 29.9%, to $14 1/8 on news it will be acquired by pharmaceutical company Alza Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AZA)") else Response.Write("(NYSE: AZA)") end if %> for $580 million, or $16.98 a share, in stock. Alza, which fell $2 13/16 to $39 5/8, said the deal will add to 1999 earnings.
Consumer credit products, fee-based products, and extended service plans direct marketer Metris Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTRS)") else Response.Write("(Nasdaq: MTRS)") end if %> regained $9/16 to $28 7/16 after sinking $14 7/8 to $27 7/8 on Friday as the company issued a statement saying it has changed its revenue and expense recognition policy in keeping with new SEC guidelines, though that won't impact earnings per share. Excluding the potential one-time impact of other changes being considered by the SEC, Metris says it is "comfortable" with analysts' mean earnings estimate of $0.74 a share for the fourth quarter and $3.46 for 1999.
Biotechnology company Neose Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTEC)") else Response.Write("(Nasdaq: NTEC)") end if %> rose $13/16 to $10 13/16 after The Wall Street Journal's "Heard on the Street" column reported that the company may soon announce a "lucrative" venture with personal care and drug company Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> to make a carbohydrate to be used as a bulking product when baking with J&J's sugar-based substitute sucralose.
Department store operator Elder-Beerman Stores Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBSC)") else Response.Write("(Nasdaq: EBSC)") end if %> bounced back $5/8 to $12 after tumbling $5 1/4 on Friday after announcing that earnings from its recent acquisition of Stone & Thomas stores will show up more in the fourth quarter than in the third quarter. The company said it was "comfortable" with analysts' EPS estimates of $1.30 to $1.35 for the year.
New Jersey Resources Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NJR)") else Response.Write("(NYSE: NJR)") end if %> picked up $13/16 to $37 3/4 after BT Alex. Brown raised its rating on the parent of New Jersey Natural Gas to "buy" from "market perform."
CIBC Oppenheimer downgraded several major banks and brokerage firms this morning, based on fears that near-term performance will be hurt by their exposure to hedge funds and the continued economic turmoil in emerging markets. Among the hardest hit, Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> lost $3 3/8 to $35 3/16, Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> fell $7 9/16 to $87 7/16, Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> dropped $3 to $40 3/4, and Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> shed $2 5/8 to $43 3/8.
Digital audio and video production and editing tools maker Avid Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVID)") else Response.Write("(Nasdaq: AVID)") end if %> slid $9 5/8 to $13 3/8 after saying it will report a "modest profit" in fiscal Q3 (excluding acquisition charges) due to delayed purchasing decisions by some of its customers. The Street had been expecting earnings of $0.33 per share in the period. Revenues are expected to come in between $112 million and $114 million, down from last year's $116.5 million.
Database software firm Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> slipped $3 1/8 to $22 7/8 after disclosing in a federal filing on Friday that deep discounts by some vendors in the database market and other pricing pressures may have the effect of "significantly reducing the prices that the company can charge for its products."
Call center management software provider Davox Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DAVX)") else Response.Write("(Nasdaq: DAVX)") end if %> was cut $1 5/16 to $5 3/16 after saying customer purchasing delays and a buying slowdown in the telemarketing services market will result in fiscal Q3 EPS between $0.11 and $0.13, or roughly half the First Call mean estimate of $0.26.
Medical diagnostic test kits maker Meridian Diagnostics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KITS)") else Response.Write("(Nasdaq: KITS)") end if %> was knocked down $2 1/4 to $4 5/8 after saying it expects fiscal Q4 EPS between $0.05 and $0.07, down from $0.16 last year and below the First Call mean estimate of $0.15. The company blamed the shortfall in part on declining sales to distributors in July and August.
Business software developer Smallworldwide PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SWLDY)") else Response.Write("(Nasdaq: SWLDY)") end if %> got a little smaller this morning, falling $2 to $7 1/2 after warning late Friday that a decrease in licensing revenues from Asia and Latin America will result in a fiscal Q1 loss of $0.14 to $0.18 per share. The Street had been expecting a loss of $0.01 per share in the period. The firm said it is reviewing its expectations for the rest of fiscal 1999, as the problems in Asia "appear to be worsening."
Business software developer PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> sank $3 1/8 to $21 3/16 after BT Alex. Brown downgraded the company to "market perform" from "strong buy." Donaldson, Lufkin & Jenrette also reduced its rating to "neutral" from "buy."
Automated manufacturing software developer Aspen Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AZPN)") else Response.Write("(Nasdaq: AZPN)") end if %> tumbled $8 7/16 to $6 3/8 after saying its fiscal Q1 revenues will be "below plan" at an estimated $46 million, resulting in a loss of around $0.26 per share for the quarter. The Street had been expecting earnings of $0.06 per share. The company also said its results for the rest of the fiscal year will be "significantly reduced" from its prior forecasts.
Enterprise resource planning software developer J.D. Edwards & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDEC)") else Response.Write("(Nasdaq: JDEC)") end if %> dropped $5 1/8 to $30 following a BT Alex. Brown downgrade to "buy" from "strong buy."
Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> leaked $1 7/8 to $41 3/8 after PaineWebber slapped the chemical company with a seldom-seen downgrade to "unattractive" from "neutral."
Dense wavelength division multiplexing equipment maker Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> slid $1 3/8 to $11 3/16 following a Goldman Sachs downgrade to "market outperform" from "recommend list."
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
Editing |