Was Cisco Really a Good Choice for the Dow?

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On this day in economic and business history ...

What is the Dow Jones Industrial Average (DJINDICES: ^DJI  ) without any consumer-facing industrial company? The venerable index found itself in a bind in mid-2009, as General Motors, the only Dow stock that might be called a "consumer industrial," collapsed into bankruptcy. What company might replace it? Could the Dow retain its identity as a barometer of American industrial strength if its only heavy-industry concerns built aircraft and earth-movers far beyond the price range of average Americans?

Perhaps it could. On June 8, 2009, the Dow's editors tapped Cisco (NASDAQ: CSCO  ) to replace the belly-up automaker, and also replaced floundering Citigroup (NYSE: C  ) with Travelers (NYSE: TRV  ) , its onetime subsidiary. When the change was announced, Dow Jones editor-in-chief Robert Thomson noted that Cisco was the right choice "because its communications and computer-networking products are vital to an economy and culture still adapting to the Information Age -- just as automobiles were essential to America in the 20th century." Citigroup's ouster was necessary as well, since its financial-crisis struggles had left the government with a substantial stake, and had left the bank in the midst of a "substantial restructuring."

Despite its high praise, Cisco turned out to be a Dow laggard -- its 30% gain in the four years following the change has thus far been nearly 45% below the index's return over that same time frame. Travelers, on the other hand, proved a better choice than Citigroup, as the former has gained 110% to the latter's 50% since the change.

Mmm, snacktacular
In another universe, the Dow might have chosen to replace General Motors with the world's largest diversified food processor: PepsiCo (NYSE: PEP  ) , which took on its modern form (or at least the better part of it) on June 8, 1965, when Pepsi-Cola merged with Frito-Lay. Pepsi was already a successful multinational at the time, with operations in 107 countries, and comments from CEO Donald Kendall revealed a pseudo-Machiavellian drive to create a whole world of snackers through the export of Frito-Lay brands. "Just as we exported soft drinks after World War II," he boasted, "we can export the snack habit. The snack food field is wide open, and our big opportunities are in the international field."

In the year before the merger, Pepsi-Cola reported $272 million in sales, compared with $184 million for Frito-Lay. The company would -- as long-term investors know -- blow past that combined $456 million in sales as it expanded its line of brands. Four decades later, PepsiCo was a true giant, with a reported $32.6 billion in worldwide sales -- representing an annualized revenue growth rate of 11.5%.

PepsiCo has quenched consumers' thirst for more than a century. But recently, the company has left shareholders craving more. With increased competition and loss of market share, many investors wonder if this global snack food and beverage giant is simply fizzling out. Are more bland results ahead for PepsiCo? The Motley Fool's premium report on the company guides you through everything you need to know about PepsiCo, including the key opportunities and threats facing the company's future. Simply click here now to claim your copy today.

Read/Post Comments (4) | Recommend This Article (4)

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  • Report this Comment On June 08, 2013, at 4:20 PM, rightislight wrote:

    Really? This is an "analysis"? Couple of points. Through to mid 2010 (using 2006 as your starting line), Cisco outperformed PEP. It's only been the last couple of years that PEP has pressed ahead while Cisco has lagged. We all know (those of us that have been around a few years) that at times some stocks will outperform others - particularly when sentiment is involved. Furthermre, if you look at the Dow, consumer names (probably because they're recognizable) hold a higer P/E. PEP is no exception at 17.3, compared to CSCO's 11.7. In fact there are only 6 DOW stocks with lower P/E's than Cisco yet only 4 that have better QoQ revenue growth. What that should tell you is Cisco has a "favorability issue" which recently has been addressed and, as any seasoned investor knows, overtime things come into balance. By the way to be clear Cisco's QoQ rev. growth is 14.5% versus PEP's 1.2%. Cisco also beats PEP handlily on earnings growth at 5.4% versus PEP's -4.6%. Cisco, at an 11.7 P/E appears to be quite the bargain, particularly when you pay attention to other important metrics like FCF, cash position, and competition (Cisco doesn't have a KO to deal with). Cisco is a bellweather for the communications sector, KO is the bellweather the Dow selected for consumer goods. I could go on and on but this article really required more time before it was printed. Silly position to take.

  • Report this Comment On June 08, 2013, at 6:58 PM, XMFBiggles wrote:

    @ rightislight -

    I wasn't comparing CSCO to PEP. This is an article about historical events in market/economic history on this particular day of the year. The first segment was just a quick look at CSCO's post-inclusion performance from 2009. The second is a quick look at Pepsi's merger with Frito-Lay back in 1965. They have about as much in common as, well, a router does to a can of soda.

    I'd rather invest in CSCO than PEP, personally, but that didn't enter into the article. Sorry if the different events were confusingly presented.

    - Alex

  • Report this Comment On June 09, 2013, at 9:40 AM, rightislight wrote:

    TMFBiggles (Alex) -

    Not sure I completely am on board with you. But for a moment let's say I am. Then let me come back with one point that is, I'm sure, obvious to you. The goal of the DOW editors isn't to select stocks that are going to outperform the market. To the contrary, the goal is to select a basket of 30 stocks that do the best job at reflecting the health (good or bad) of the economy by choosing companies that are bellweathers in their respective categories. Cisco is a category leader in a sector that wasn't represented, or such was the feeling of the editors. Simple as that.

    Now, the truth? You did try to suggest PEP was a better choice. You said "the Dow might have chosen to replace General Motors with the world's largest diversified food processor: PepsiCo". Now, sure PEP may have performed better during the period but the DOW has representation in that sector from KO. I mean you could argue that the DOW could have selected a healthcare company because healthcare is under represented including in your argument that technology was already reflected with stocks like INTC, MSFT, HPQ (which has been a worse performer than Cisco along with BAC and AA during the period in question) but you didn't.

    Sorry, the entire foundation for the argument is lost on me given your response here. By way of the title you have suggested that CSCO was a bad choice but then go on to make either no case (your view) or a case that PEP was a better choice (my view) but really have done neither? I'm confused....

    BTW: Have you mapped the DOW and the S&P during the period in question? I think you'll find that CSCO's inclusion has had no negative impact to the DOW performance.

  • Report this Comment On June 09, 2013, at 10:12 AM, XMFBiggles wrote:

    @ rightislight -

    I did prefix the PEP segment with the phrase "In another universe", which was meant to:

    1: quickly connect the two otherwise-unconnected segments.

    2: play up the strength of the company I was about to write about without trying to imply a direct comparison to CSCO.

    I'm sorry if my wording led you to read a comparison where none was directly implied. My intent in this piece was simply to show that CSCO was selected to the Dow in 2009 and has underperformed it since then, and then to show that PEP was created in 1965 when Pepsi-Cola merged with Frito-Lay and has since grown to become the world's largest snackfood company.

    There are a number of ways to directly compare Company A to Company B. You've already pointed out that my comparison makes no sense. The reason it makes no sense is because I'm not trying to make a comparison at all. It's just a "this day in history" piece, as disclaimed at the top in italics and reinforced by the use of different dates in each section.

    I can have the first part of that sentence removed so that it doesn't say anything about the Dow as it might relate to Pepsi, if that would be preferable for you.

    - Alex

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