Canada Markets open in 4 hrs 46 mins

Cisco Earnings: 2 Key Things Investors Should Know

Yahoo! Finance
The Exchange

By Marek Fuchs

Cisco (CSCO) reports its second-quarter earnings after market close on Wednesday, and traders and analysts can hardly contain their excitement.  The stock recently skipped through its 52-week high, hitting $21.27 in intraday trade on Tuesday, as analysts from Citigroup (C), Raymond James (RJF), Piper Jaffray (PJC) and more tumbled over each other to reaffirm their happy thoughts and raise expectations.

But is all the go-go energy warranted?

Perhaps.  Cisco is obviously a great company with flush margins and mounds of cash.  As is always the case with quality companies, we must avoid the temptation to simply hate them because they are beautiful.  By the same token, however, the media and traders might be ignoring – or, at least, downplaying – two significant elements.

For one, Cisco is commonly dubbed “the bellwether for the technology sector” by The Wall Street Journal and other media outlets. Of course Cisco provides the routers and switches that provide architectural structure for the Internet.  They are a technology company, in a big way.  But Cisco is also a plain, fat-free vanilla government contractor.  Roughly a quarter of its business comes from the government.

But as you go through the Cisco earnings previews out there, you are unlikely to see more than the occasional mention of the company’s considerable level of government dealings. And that’s quite an oversight.  Government buying was off 6% in the first-quarter of 2103, Cisco reported in November – and that was before the totality of the paralysis brought about by the uncertainty of the election and the fiscal cliff debacle.

Moreover, Cisco caters to more than just the United States government; state and local governments, often in worse financial straits than the federal government, are also big customers. And let’s not even talk about those fizzling European governments.

Here’s another item.  Classically, Cisco grants quarterly guidance in the conference call following the earnings release.  It is there that CEO John Chambers often does an Apple style (AAPL) rope-a-dope, lowering expectations.  Some (such as Seeking Alpha) are alerting you to this.  Others (and, yes, Investor’s Business Daily and TheStreet, I’m talking to you) are not.

Investors would do well to stay alert for Chambers. After surpassing expectations in the company’s first quarter, for example, Chambers turned sob sister in the conference call.  He said, among other items, that "We are modeling Europe to get worse before it gets better."  Theoretically, that’s just what an investor wants: a CEO that forsakes the wishful thinking or flat-out con jobs and simply assumes the worst.  But Chambers’s prudency always holds the potential to flatten the stock’s run, at least in the short run.

After Cisco reported its third-quarter back in May, Chambers was a real killjoy, saying: "the [12 - 17 percent] growth rate that we sometimes talked about in the past... is not reflective of the environment either."  Earnings, mind you, hit expectations, but looking forward, Chambers, in fairly typical fashion, threw around words like “hesitant,” “downturn,” “challenges” and “dragging.”  He didn’t open an umbrella indoors during the conference call, but he pulled up just short. “Cisco Gives Grim Outlook for Tech,” reported The Wall Street Journal, and the stock took a deep drop in after-market trading.

Remember: People are aware of Apple’s sad sack routine.  But Cisco does it just as much.  And anticipation of what is to come is, as always, the better part of valor.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.