Cisco's (Nasdaq: CSCO) Huge Miss Bodes Well For This Stock
What do you do when your company's earnings missed analyst expectations by 15 percent? You get your merger and acquisition team together and start shopping.
That's sure to be the case right now at Cisco Systems (Nasdaq: CSCO) after the company reported earnings of just $0.34 per share in the first quarter. Analysts had expected $0.40 per share, and while the company's 13 percent earnings growth (it earned $0.30 per share in the comparable quarter in 2009) is nothing to sneeze at, guidance of only 3 to 4 percent revenue growth fell well short of expectations of 13 percent.
Taken together, a weaker than expected quarter and slower than anticipated revenue growth moving forward has the stock down over 15 percent this morning.
***Cisco has often turned to acquisitions to spur growth, and I have to believe the company is shopping right now. CEO John Chambers stated that the company hit a couple of 'air pockets' in a phone interview with MarketWatch.
To fill those air pockets, the company will have to look to niche markets that it doesn't have a strong presence in. It's typically easier, and cheaper, to buy a company that already is a leader in a niche market than to try to grow a presence organically.
“This does raise the concern that the networking market is slowing down,” said Kaufman Bros. analyst Shaw Wu in MarkeWatch's article. “But it seems that a lot of it is company-specific.”
***One area where growth is anything but slow is internet security and bandwidth management. Companies that can accommodate increasing demand for streaming video and other bandwidth intensive technologies are winning contracts around the world.
Check out the performance of Radware (Nasdaq: RDWR) and Riverbed Technology (Nasdaq: RVBD) as compared to Cisco since the beginning of the year. Both of these stocks are up over 100 percent versus Cisco's zero percent return.
These stocks are rallying because they are growing in their respective niche markets. They're also being helped along by the ever present takeover potential in a market where technology companies like Cisco are flush with cash.
Cisco just reported that it has $38.9 billion in cash and equivalents at the end of the first quarter, a slight dip from the end of the previous quarter because it's buying back its own stock.
What's it going to do with all this cash? Bloomberg reported that Chambers has voiced his intent to pay a dividend in 2011 "...once the economy and the company's stock strengthens". Well, with the company issuing a somewhat bearish outlook and the stock getting hammered, I don't know that the dividend is that much of a sure thing anymore.
***I've been pounding the table that small cap investors should be adding exposure to technology stocks for a while. And I'm not the only one - although I'm sure the pundits will come out in droves now that Cisco's results are out.
I recently read a Credit Suisse research report that dug into the Russell
2000 small cap index. The report gave an outlook by sector for 2010.
Guess what Credit Suisse is saying about small cap technology
stocks...
"Within Tech, we remain wary of Semis with a preference for Software/Services and Communication Equipment...Our continued overweight on Technology is driven in part by our view that this sector may continue to benefit from increased mergers and acquisitions activity, based on high levels of conversations by public companies in the space about their desire to do deals, as well as high levels of cash to deploy and fairly clean balance sheets."
***One of my favorite small cap stocks is a company that segments bandwidth so telecommunications companies can better manage resources. It’s a pretty complex technology, and this company is a leader in the field.
In fact, I brought this company to the attention of Small Cap Investor PRO readers in the beginning of August. We're already up over 60 percent on the position - but I think the stock has a long way to go. You can learn more about rising technology company when you get a trial subscription here.
This particular company is a play on the future growth of smartphones, and the near certainty that service providers will segment bandwidth in order to design service plans tailored to customer behavior.
What's more, this tiny company is certainly a potential takeout candidate and management has shown an ability to orchestrate acquisitions in the past.
With Cisco's rough quarter, and feeble outlook, I expect that companies like this one are in the crosshairs. And even if it isn't, its strong growth is already rewarding shareholders. For small cap profits, I continue to recommend you increase exposure to growing small cap technology companies like this one.
I had few responses to my question yesterday. Where is everyone? What is
your favorite small cap technology stock? Throw your ides my way and I'll
review them in a future issue. My address is: editorial@smallcapinvestor.com.
