Thursday, February 10, 2011

Cisco Systems (CSCO) Weighs on Markets

Quite a few interesting reports last night, including a not so hot reaction to Akamai (AKAM) and quite positive earnings report from Whole Food Markets (WFMI), but much of the attention is focused on the 2nd disappointing report (in as many quarters) out of Cisco Systems (CSCO).  This has led to something very rare nowadays - a materially negative premarket.  We will see how many hours minutes it will take for the dip buyer surge in, but with the Dow up every single day since the Egypt selloff there is some chance we actually close in the red.  But never fear, the now almost patented Monday morning premarket gap up is not far away, and you know what that means - we all have to buy into the market by Friday afternoon to get our "free money" Monday.

While it is a Dow component the inane structure of the DJIA is price weighted, hence a company like IBM at $160 is roughly 8x as more influential than Cisco at just over $20.   CSCO is down over 10% in premarket, back into the upper $19s.

  • Cisco Systems, the largest provider of networking equipment, posted a gross margin that missed analysts’ estimates as the company spent more to develop products and competitors undercut them on prices.  Gross margin, or the percentage of profit left after subtracting production costs, fell to 62.4 percent in the period ended Jan. 29. That missed the 63.3 percent average of projections compiled by Bloomberg.
  • Cisco may be cutting its prices and extending better terms to its customers, giving them longer to pay, said Mark Sue, an analyst at RBC Capital Markets. “The product gross margins declined quite meaningfully,” Sue said. “We know demand is improving, but will Cisco capitalize on that? And will it have to resort to price cuts to get its fair share?”
  • Profit excluding some items this quarter will be 35 cents to 38 cents a share, short of the 40-cent average prediction. Sales will rise 4 percent to 6 percent from a year earlier, the company said today on a conference call. That would mean revenue of $10.8 billion to $11 billion. Analysts on average estimated sales of $10.9 billion, with some projecting as much as $11.3 billion.
  • Investors look to Cisco as a bellwether for the technology industry because it dominates the market for routers and switches, products that direct the flow of Internet traffic. Companies buy its switches for corporate networks, while phone and Web-service providers typically purchase Cisco’s more- expensive routers.
  • Earnings excluding some costs were 37 cents a share, Cisco said. That compared with 35 cents, the average of projections compiled by Bloomberg. Sales rose to $10.4 billion, also topping the average $10.2 billion estimate.
  • The public sector in the U.S., Europe, and Japan is facing budget constraints that will affect spending for the next several quarters, Chief Executive Officer John Chambers said on a conference call with analysts.
  • “They’ve become the Procter & Gamble of networking,” said Joanna Makris, an analyst at Mizuho Securities USA Inc., referring to the world’s largest consumer-products company, which has more than 70 brands. “The stocks that have outperformed them have been the more focused, nimble companies.”
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