Analysts Part Ways on Cisco's Outlook

Yeehaw!

The Cisco (CSCO) kid was rip-roarin' and rootin'-tootin' today after Lissa Bogaty, a Credit Suisse First Boston analyst, bucked a recent trend and said something nice about the company. But not everyone was in agreement with her view, like UBS PaineWebber analyst Nikos Theodosopoulos, who released a bearish note on the networking sector this morning.

"We believe Cisco will become one of the major players in optical networking over the next year or two," the bullish Bogaty wrote. "Recognizing that this may very well represent the minority point of view, we offer much of our supporting thesis in our note."

Bogaty doesn't think things can get any worse for Cisco. Theodosopoulos does. Investors favored the bullish view, sending Cisco up 81 cents, or 3.4%, to $23. In the past week, Cisco fell to two-year lows and is off 40% this year.

Bogaty claimed that the company is developing new products that could lead to increased sales. She also said that its focus on larger clients instead of smaller shops, which have been slashing spending and/or going out of business, would result in the announcement of new contracts. And with some good news on the horizon, the analyst didn't focus on all the bad news out there in the networking sector.

"We expect product news and contracts to be the catalysts for the stock after we see an end to downward revisions," she wrote.

But Theodosopoulos disagreed in a note to investors this morning, reducing his fiscal 2001 earnings per share estimate to 73 cents from 74 cents and dropping his price target to $30 from $40. Unlike Bogaty, he believes that investors should wait to hear more from Cisco before jumping into the stock.

"For long-term investors, this is probably not a bad price," Theodosopoulos said in an interview. "The bottom line, valuation and P/E [price-to-earnings] multiples are all pretty good. But the 'E' -- the 'E' is the question. I'd like to get through the first quarter first."

Essentially, Theodosopoulos sees a networking sector that faces some giant-sized problems. In this morning note to investors, he wrote that global telecommunications equipment revenue would only grow by 9% in 2001, a far cry from the 22% growth expected by Cisco when it entered 2001.

"We believe it is likely that the below-trendline growth we project for 2001 will not be a one-year blip."

Theodosopoulos drew a historical parallel between slowing spending for Cisco's products and slowing spending for cable equipment in the mid-1990s. Back then, to cope, many cablers went through a rationalization process, which included shakeouts, mergers and alliances. He said that such a rationalization will curb spending on networking equipment, just as it did in the cable industry.

"[Rationalization] led to disruptions in cable telecom equipment spending for two to three years, with the equipment stocks stuck in a range for most of that time," he wrote. "The telecom service companies are going through a similar process now."

Simply put, the UBS PaineWebber analyst does not think that the worst news is in the past. No, he expects more revisions within the optical sector and a tough first quarter. Theodosopoulos wants more guidance before jumping into networkers with gusto.

"Why not wait until that gets out of the way?"

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