Cisco Spins Its Wheels in Slowdown

A slowing pace at Cisco (CSCO) jammed up the communications equipment sector Wednesday.

Shares across the industry skidded after the San Jose, Calif., maker of Internet traffic-management gear suggested the widely anticipated tech spending rebound is losing traction. Wall Street analysts stepped in with a series of downgrades, goosing a broad tech selloff.

After posting solid fiscal fourth-quarter numbers Tuesday, Cisco chief John Chambers, in his self-appointed role as economist, warned that CEOs he has talked with recently have grown more cautious in their outlook.

The comments, along with surging inventory levels and higher projected operating costs, sent Cisco shares down 10% Wednesday. The selloff, which knocked the stock down $2.03 to $18.43, puts Cisco within a dollar of its 52-week low and leaves it more than 33% below its 52-week high.

Taking the ride along with Cisco were gear peers like Juniper (JNPR), Lucent (LU) and Nortel (NT), all of which dropped more than 3%.

In the wake of Cisco's earnings report and conference call Tuesday, analysts at UBS, Merrill Lynch and JPMorgan Chase swiftly issued downgrades. Cisco's in-line fiscal fourth quarter earnings and Chambers' tepid sales talk left little material to build a bullish case on.

"These guys aren't supposed to have ho-hum quarters," says JPMorgan Chase analyst Ehud Gelblum, who cut his rating to neutral from buy.

Gelblum lists a few concerns in his research note Wednesday, including inventory piling up 38% over the past three quarters. Tellingly, that's more than double the 16% revenue growth rate for the same period. On a conference call Tuesday, Cisco executives blamed some of the stockpiling on shorter lead times, meaning customers want orders filled faster. The problem with short order times is that Cisco must keep more gear on hand rather than ordering as needed from its suppliers.