Cisco is not without its own problems, and the stock crashed from $82 in 2000 to $8 in early October. Even so, sales grew 24% a year (better than twice that of the S&P 500 over the last five years). Unlike cars, which are commodity products after 100 years of development, telecommunications equipment is undergoing rapid change and improvement. All the hardware delivered in 1997-2000 will be obsolete by 2003. With significantly fewer competitors in this industry group, I see Cisco doing very well over the next five years.
Asset/Liability Mismatches
Companies get in trouble when their assets are short-term and liabilities long-term, or vice versa. A classic example was the Savings & Loan industry in the 1980s -- local banks took demand deposits (a short-dated liability) and lent the money out for mortgages (a long-dated asset). All was fine when interest rates were stable; when interest rates surged, banks found themselves financing low fixed-rate mortgages with high variable rate deposits. The industry was virtually wiped out in a matter of years, eventually liquidated by the Resolution Trust Corporation. Banks, such as J.P. Morgan Chase (JPM - commentary - Cramer's Take), Citibank (CSCO - commentary - Cramer's Take) and Fleet Boston Financial (FBF - commentary - Cramer's Take), do a pretty good job of hedging interest rate risk, so the asset/liability risk is low. However, as we saw with Fannie Mae (FNM - commentary - Cramer's Take) earlier this year, even the most skilled hedgers get into trouble sometimes.
Airlines have a different problem. Liabilities, in the form of aircraft leases and employee contracts, are long dated. Airplane fuel, even with hedging, is a highly variable cost. The primary assets of airlines -- seats on a plane -- are valued at zero if empty when the plane takes off. The competitive impulse, therefore, is to price seats as low as necessary to fill the plane. Older airlines, such as UAL (UAL - commentary - Cramer's Take), are most vulnerable, but I don't even feel comfortable investing in the younger discount airlines, such as Southwest (LUV - commentary - Cramer's Take) or JetBlue (JBLU - commentary - Cramer's Take). As we learned this week, it looks like UAL can't avoid bankruptcy at this point.
David Edwards is a portfolio manager and president of Heron Capital Management, a New York management firm. Edwards was a contributor to Harry Domash's Fire Your Stock Analyst: Analyzing Stocks On Your Own available at Amazon. At the time of publication, his firm was held positions in Cisco, JP Morgan, Citigroup, Fleet Boston, Fannie Mae, Vornado, Agree Realty, Wal-Mart, Target, Home Depot, ExxonMobil, Baxter, Quest Diagnostics, Pfizer, Merck, Amgen, Genzyme and Incyte Pharmaceuticals, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Edwards appreciates your feedback and invites you to send it to David Edwards.
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