Cisco Systems: switching on by Fat Prophets

f the global economy has seen the worst of its downturn, then there should be a revival in spending on information and technology. At the centre of the recovery will be the manufacturers of the basic equipment of the internet such as Cisco Systems. We added Cisco to our watch list in June as a Traffic Light (FAT168) and have now moved to add the stock to our portfolio as a buy.

From a charting perspective, the Company’s share price is very similar to many Nasdaq listed stocks. As evident on the monthly chart, the dot com bubble lead to an exponential rise in prices during the late 1990’s, culminating in a blow off top in early 2000. Since this high, prices have effectively been in a long-term bear market.

With the majority of the decline occurring during the first 2 years, Cisco has since traced out a lengthy basing pattern since 2001. In our opinion, once this period of consolidation is complete, there is potential for a sustained upward trend to emerge.

Cisco is due to report its 4th quarter earnings on 5 August. The 3rd quarter contained very little good news in terms of the financials with all products and all regions showing declines in revenue compared to the prior year. In part, this reflected many companies’ reactionary response to the global financial crisis, resulting in deferred capital expenditure plans. It is our view that capital expenditure that was deferred in the last two quarters is now likely to be resurrected as companies regain confidence in their markets.

In addition, as we noted in our previous note on Cisco, the company is embarking on a fresh approach to doing business. Chief Executive John Chambers describes it as selling companies a business model that solves problems and not just network gear. Cisco’s TelePresence videoconferencing equipment is a good example, allowing large corporations to save time and expense when communicating around the world. Mr Chambers himself conducts many of his own meetings, both internally and externally, using this equipment.

Mr Chambers calls this new approach a point of inflection as it will mean a major step up in the way Cisco looks at its addressable market. It will also mean doing business directly with customers that may have previously purchased Cisco’s equipment through an intermediary such as IBM and Hewlett-Packard, who are two of Cisco’s major clients.

Obviously this will risk alienating these valuable customers as Cisco seeks to by-pass and compete with them in providing these so-called solutions for customers. But Mr Chambers believes Cisco has the maturity and ability to assume that risk. The reward will be an almost unlimited market for the provision of intelligent technology solutions in a world that is increasingly network-centric.

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