Boring Portfolio

Boring Portfolio Report
Friday, February 21, 1997
by Greg Markus (MF Boring)

ANN ARBOR, Mich. (Feb. 21, 1997) -- The world of Dow stocks and the S&P 500 was all lollipops and roses on this double-witching Friday. Not so for the Nasdaq, and not so for Nasdaq stocks inhabiting the Boring Portfolio.

The Borefolio lost 1.10% on Friday, and 2.48% for the week, basically in line with the Nasdaq Composite Index. Worst hit was CISCO SYSTEMS (Nasdaq: CSCO), which fell $4 1/2 on volume in excess of 24 million shares today.

I devote the entirety of tonight's recap to Cisco. The stock hasn't been able to regain traction since Cisco issued its quarterly earnings report on Feb. 4. What gives?

A story by Andy Reinhardt in the latest issue of Business Week purports to provide the answers. After reading the litany of Cisco's woes detailed in that article, one wonders how CEO John Chambers manages to get out of bed and drag himself to work each morning. Here's a quick rundown of the reasons for "Cisco's Skid," according to Business Week:

1. Revenues from sales of routers will grow "only 30% this year," says analyst Eric Blachno at Bear, Stearns.

2. Sales in Europe are "sluggish."

3. Cisco's plans to introduce new and upgraded products later this year could cause customers to hold off on making new purchases now.

4. As a result of all this, revenues will increase by only 5% sequentially in the current quarter, according to Prudential analyst Luke Szymczak.

5. Moreover, Cisco's last quarterly performance "troubled investors" because Cisco "met but did not exceed Wall Street's earnings expectations."

6. A new technology, called Internet Protocol (IP) switching, is "the biggest threat to Cisco we've seen in several years," according to Paul Callahan of Forrester Research Inc.

That's quite a list. But Reinhardt could have added at least one more big item to it. He missed the fact that Microsoft plans to invade Cisco's turf by integrating routing technology into Windows NT through a new software product, code-named Steelhead.

According to stories circulating in various trade magazines, Microsoft began alpha testing Steelhead late last year. It's unclear yet whether Steelhead will be part of NT 5.0 or available as an add-on. Either way, the big idea is to enable businesses to reduce considerably the need for routing hardware for their corporate intranets by relying largely or perhaps entirely on software to perform the routing of data packets.

Holy Moley! No wonder traders are unloading Cisco stock by the shovel-full! Run for your lives! Red alert! Red alert! Sell now! Think later!

And so forth.

Hey, I'm just one boring guy managing one little Boring Portfolio, so my thoughts on this may be worth exactly what you paid for them. Nevertheless, permit me to suggest that when folks are complaining that Pentium chips have a problem with long division, or that Windows 95 is a Potemkin village erected around a DOS shack, or that Cisco's future in communications technology is "challenged" -- well, let's just say that someone is buying up all those shares that are being sold.

A few points to consider:

1. Maybe router sales will increase "only" 30% this year. Router sales will account for roughly one-third of Cisco's profits this year. The other two-thirds of revenues will come from sales of products that are likely to experience revenue growth faster than that -- way faster, in some cases. For example, when Cisco acquired StrataCom last spring, that company's quarterly sales of ATM and Frame Relay products was $90-100 million; now it's at $160 million, according to information provided in Cisco's conference call with analysts.

2. Yes, Cisco's sales are slow in some parts of Europe -- France, for example. Sales in other parts of Europe -- the Nordic countries, Eastern Europe -- are not. And sales in many other regions of the world are booming. Also, did you happen to read anything about that little Global Telecom Deregulation agreement signed last week-end in Geneva by 60 countries? The one that opens up vast new markets for telecommunications infrastructure suppliers like Cisco? Think of it: 80% of the world's people have never used a telephone, let alone gotten wired into the Internet. Experts project that developing countries will require $60 billion a year in capital investment for telecommunications.

3. Yes indeed, Cisco plans to introduce new and upgraded products later this year. That's great news, not bad news. If you were a Cisco shareholder (and I surely am), would you want it any other way?

4. Perhaps revenues will increase by only 5% sequentially in the current quarter. But that's a sequence from one of Cisco's seasonally stronger quarters to one of the company's seasonally slowest ones. Besides, even that paltry rate annualizes to 22% annual growth -- a rate well below the long-term growth rates projected by even the most pessimistic analysts, according to the latest information from First Call.

4b. Speaking of First Call, the consensus EPS estimate for the fiscal year ending in July is $2.10, which would constitute a stunning 51% advance over FY96. At today's prices, CSCO is trading at 28-times those earnings. Preliminary estimates for FY98 are in the area of $2.77 -- or 32% growth. By the way, in the past week analysts' consensus earnings estimates for Cisco's 1997 and 1998 fiscal years have each risen a penny.

5. Contrary to what Biz Week says, Cisco's last quarterly report exceeded "Wall Street's earnings expectations" by a penny. I was in on the follow-up conference call, and analysts were gushing over the results. As I say, EPS revisions have gone up, not down, following the company's report.

6. We've been discussing IP switching in various areas of The Motley Fool for approximately six months now, along with Cisco's alternative technology, called tag switching. This is not exactly new news. As explained by Dave Kosiur in the February issue of Sun World, tag switching adds a tag to each data packet so that switches can forward traffic onto specific virtual circuits by reading the tag rather than depend on routing information buried deeper in each packet.

Among tag switching's not inconsiderable advantages are that it's a software-only upgrade -- the enormous installed base of Cisco equipment need not be ripped out and replaced with a "forklift upgrade" of new hardware. Also, as long as multiple protocols for data transfer exist -- and they will for some years yet -- a pure IP solution is not realistic. In sum, tag switching promises to offer the fast-forwarding advantages of switching, while working with existing hardware and, not incidentally, Cisco IOS software, which is the lingua franca of network traffic management. Check out information at Cisco's website,, for further information.

7. Okay, but what about this Steelhead thing? Well, a recent InfoWorld Test Center review, written up by Jeff Symoens, summed it up this way: "Steelhead ... will generally appeal to sites that need a low-end to midrange routing solution, but at least in this early version, it's not a particularly compelling routing product."

If you've made it this far through all the foregoing techno-jargon, congratulations. On the other hand, if you skipped straight down to the bottom line ...well, congratulations -- because my opinion is that all the point-by-point debating misses the Grand Unifying Concept.

The Grand Unifying Concept is that the convergence of digital communications -- voice, video, data -- is far, far bigger than the revolution of moving computing from the Corporate Computing Center to your backpack or even the revolution of the World Wide Web, which continues to accelerate at so fast a clip that "Web Weeks" have come to replace years, or even quarters, as the unit of temporal measurement.

This new revolution will see Intel, Microsoft and Cisco operating simultaneously as competitors and partners -- the "coopetition" that Harvard Biz School gooroos proselytize. Just because the gooroos say it's so doesn't necessarily mean it's false. In this case, they're right.

We're way past the end of tonight's episode, and so we'll have to leave our heroine tied to the railroad tracks as the train approaches. But if you want to sneak a peek at how the story could turn out, click over to the website of The Red Herring magazine at and read their cover story on Cisco.

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Today's Numbers

Stock  Change    Bid
BGP   -  1/8   43.50
CSL   -  1/4   34.13
CSCO  -4 1/2   58.38
GNT   -  5/8   38.25
ORCL  -  3/4   40.88
OXHP  +  1/4   58.88
PMSI  ---      11.13
SLR   -1 1/8   56.13
TDW   +1 1/2   43.88
                   Day   Month    Year  History
        BORING   -1.10%  -1.23%   3.30%  18.87%
        S&P:     -0.13%   1.99%   8.24%  28.98%
        NASDAQ:  -0.97%  -3.30%   3.35%  28.18%

    Rec'd   #  Security     In At       Now    Change

  2/28/96  200 Borders Gr    22.51     43.50    93.23%
  8/13/96  200 Carlisle C    26.32     34.13    29.63%
   2/2/96  200 Green Tree    30.39     38.25    25.87%
  5/24/96  100 Oxford Hea    48.02     58.88    22.59%
   3/8/96  400 Prime Medi    10.07     11.13    10.49%
  6/26/96  100 Cisco Syst    53.90     58.38     8.30%
 10/15/96  100 Solectron     54.52     56.13     2.93%
 12/23/96  100 Tidewater     46.52     43.88    -5.70%
 11/21/96  100 Oracle Cor    48.65     40.88   -15.98%

    Rec'd   #  Security     In At     Value    Change

  2/28/96  200 Borders Gr  4502.49   8700.00  $4197.51
   2/2/96  200 Green Tree  6077.49   7650.00  $1572.51
  8/13/96  200 Carlisle C  5264.99   6825.00  $1560.01
  5/24/96  100 Oxford Hea  4802.49   5887.50  $1085.01
  6/26/96  100 Cisco Syst  5389.99   5837.50   $447.51
   3/8/96  400 Prime Medi  4027.49   4450.00   $422.51
 10/15/96  100 Solectron   5452.49   5612.50   $160.01
 12/23/96  100 Tidewater   4652.49   4387.50  -$264.99
 11/21/96  100 Oracle Cor  4864.99   4087.50  -$777.49

                             CASH   $5999.08
                            TOTAL  $59436.58