Dow Jones Industrial Average: Cisco may have the right stuff

By Brad Reese on Wed, 03/11/09 - 8:39am.

What NASA is to space exploration, the Dow Jones Industrial Average (DJIA) is to stock investing and according to a recent Reuters report, Cisco may have the right stuff to be a "blue chip" replacement for Citigroup and/or General Motors should either one get the boot by the Dow Average for having a low stock price.

Currently the Dow Jones Industrial Average consists of the following 30 companies:

Currently the Dow Jones Industrial Average consists of these 30 companies

Analysts such as Mark Sue think Cisco does have the right stuff. While some market segments are soft for Cisco, the company seems to be making up for it in other areas and is trading at a healthy earnings per share. In his research note to yours truly today, Sue recaps his thoughts after meeting with Cisco during the RBC West Coast Tour:

"Overall visibility remains limited for Cisco's service provider segment and the company is reluctant to say whether or not it's reaching a base revenue level for its router segment. Router revenues declined -19% sequentially in the January quarter and may see another level of decline during the current April quarter. Overall, RBC is estimating total revenues of $8.1B (-11% QoQ) vs. the consensus of $8.1B. Nonetheless, Cisco highlighted that the network migration towards IP on the service provider side remains well intact, providing a broad positive long term view.

"Cisco continues to see robust video and data traffic growth despite the current economic malaise and is investing in improving its router products such as the ASR Series. Cisco may in our view see broader adoption of its new ASR family while it continues to see demand for its older 7600 series. A recovery as defined by sustainable sequential growth still remains difficult to ascertain and will remain customer and geographically dependent."

Sue continued, "Cisco - according to service provider co-head SVP Pankaj Patel, is also seeing strong interest in wireless backhaul applications, a view echoed by Alcatel Lucent as well in our meetings yesterday. Considering the high prices of T-1 and E-1 lines, wireless carriers may be moving faster towards Ethernet and IP wireless backhaul in both the U.S. and Europe. Incidentally, Cisco believes further opportunities exist with key customer Verizon for the LTE network migration despite not being announced as a primary vendor during the first round.

"Investment priorities at Cisco remain video, collaboration, virtualization, data center, and globalization. Increased network loads will eventually drive upgrades in routing although duration remains difficult to discern. Cisco interpreted AT&T's reiteration of capex ($17B to $18B in 2009) as a positive as data usage continues to ramp in both wired and wireless networks."

Sue concluded, "As far as the stock is concerned, Cisco's shares are now trading at 12 times our CY10 earnings of $1.25 or closer to 13 times based off what we believe is our trough CY09 EPS. Our rating is Outperform considering Cisco remains well placed longer term in the service provider segment with an expanding product portfolio supported by its strong execution focus."

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