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Cascade Slides After Earnings News

A penny, a penny, just a penny.

On Wall Street, a penny often doesn't mean jack. Thursday evening

Cascade Communications

(CSCC:Nasdaq) topped analysts' consensus expectations by a single zinc-copper coin, and the company's investors shuddered. Apparently, that troublesome "whisper" number is antagonizing another high-tech company.

Ahead of the earnings report, Cascade, a maker of important networking equipment, rose gently before finishing the session unchanged at 64 1/8. But after the close, the company reported fourth-quarter earnings of 24 cents per share, more than doubling the 10 cents per share profit one year earlier and beating the

First Call

estimates of $0.23. Revenue was $110.3 million, compared to $46.2 million, and net income jumped to $23.4 million from $9.1 million a year before.

Great numbers! Well, not really. Miffed by Cascade's apparent failure to punch out the whisper number (closer to 30 cents than 24) traders pounded Cascade in an after-hours scramble. Shares fell sharply, with bids being made at 54 by 4:45 p.m., with modest upward bias.

In October Cascade had beaten the

First Call

third-quarter consensus estimate by a whopping two pennies, but the next day finicky investors still punished the stock.

Investors sprinted from Cascade because the stakes in the networking equipment sector have reached intense levels. The recent destruction of

Shiva

(SHVA:Nasdaq), whose shares tumbled 15 5/8 to 19 1/4 on Jan. 8 when its numbers undershot estimates by a wide margin, underscores the quick-exit mindset in the sector. Valuations are high, and the winners keep climbing. Each time a company falls from the pack, as Shiva has, the result can be terrifying for investors. Cascade, slipping a second time, could be getting Shiva-esque shivers.

Prior to the earnings report, investors expressed certain calm. "I don't think anybody's expecting a big surprise," Jim McCall, portfolio manager for

PBHG Core Growth

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fund (PBCRX), said in early afternoon. He likes Cascade's long-term growth prospects and said he would be holding onto his shares.

Cascade's drastic stock runup in recent months, however, convinced at least one big-name investor that the momentum game has played out. Alan Alpers, portfolio manager of

Navellier Aggressive Growth

(NPFGX) sold all his entire Cascade position in the last month. Navellier had owned 400,000 shares at its peak in December.

Cascade's future hinges on one question: Can burning sales in a red-hot business justify the sky-high valuation? It trades at 21 times sales for the trailing 12 months, topping network peers such as

Fore Systems

(FORE:Nasdaq) (7.5),

Cisco Systems

(CSCO:Nasdaq) (10) and

Ascend

(ASND:Nasdaq) (16.5).

Granted, the potential for growth is huge. Cascade builds "frame relay" switches, which shuttle data bits through the Internet and other networks. With new product shipments and the recent acquisition of

Sahara Networks

, Cascade is sidling into the area of ATM switching. ATM is a similar technology that works well with video as well as voice and data.

ATM is expected to become a huge market, but market dominator Cisco competes in that sector as well. While Ascend sells competitive frame relay instruments, some of its devices require a complementary unit from Cisco or Cascade.

Cascade is elbowing its way into another area. In the first half of 1997 it is shipping its first "remote access" products, which Internet Service Providers use to tie their customers into that grandaddy of networks. And a new "IP Navigator" software upgrade makes Cascade's switches more intelligent, able to handle the advanced tasks of Cisco's routers.

Each of the major companies is buying niche suppliers to raid one another's markets. Each wants to be the fastest grower in a fast-growing market. The

Yankee Group

research firm estimates that wide-area network ATM sales will grow at a 42% annual clip through 2000, while local-area sales will increase more than 100% each year.

But Cascade's breakneck earnings gains could slow this year. According to

First Call

, its EPS jumped 160% in 1996; in 1997 the estimate is for a 54% gain. Heady, but maybe not enough for momentum animals. Company officials were unavailable to comment on stock activity or market valuation.

By Kevin Petrie

kpetrie@thestreet.com