Boring Portfolio

Boring Portfolio Report
Wednesday, February 4, 1998
by Greg Markus (TMFBoring@aol.com)


ANN ARBOR, Mich. (Feb. 4, 1998) -- Healthy gains in five of its six holdings propelled the Boring Portfolio past the benchmark averages today. Yesterday evening, Cisco Systems (Nasdaq: CSCO) reported that fiscal second quarter earnings rose 26% to $0.43 per share (diluted). That beat analysts' consensus estimate by a penny and matched the top-end of the range of forecasts, according to First Call. Quarterly revenues surpassed $2 billion, up 27% from a year ago and up 8% from the immediately preceding quarter.

Today, analysts are fine-tuning their financial models and tweaking their EPS projections by a penny here and a penny there. On The Motley Fool's stock discussion boards, participants are debating whether Cisco's stock is poised to launch higher, rest for a while, or pull back in the next few days or weeks or quarters.

And there are questions. Did Cisco really pass Ascend (Nasdaq: ASND) in sales to Internet service providers in the quarter, as Cisco chief executive John Chambers claimed in the conference call? How will the Kid manage the transition from "legacy" routers to new layer-3 switches, or swouters, or whatever? Could Asian orders slow further yet? Will European sales continue to ramp up nicely?

These are all good questions. They matter... some more than others. But none of them touches what I think is the key message that Cisco delivered last night.

That message is that Cisco, the nimblest of the nimble giants, a company that scarcely existed when this decade began and that will approach $8.5 billion in sales in its current fiscal year, is poised to leap into a hugely profitable and wildly exciting third phase of its brief existence.

The first phase began when Cisco's husband-wife team of founders began building devices in their living room to allow computers on Stanford University's campus to speak with one another in the early 1980s -- and soon discovered that a healthy market existed for their "routers," as the devices were called.

Cisco entered its second phase in September 1993 when it acquired Crescendo Communications, a relatively small company involved in high-speed switches that worked in conjunction with Cisco's routers. During this second phase, John Chambers and his team have negotiated a breathtaking series of acquisitions, dramatically transforming Cisco from a "routers only" shop into a true end-to-end data networking titan.

The just-completed quarter marks the beginning of Phase Three. Cisco announced to the world last night that it absolutely intends to lead the way in the integration of data, voice, and video communications. Although many details of that integration remain to be determined, three things are very clear, even to the utter nonexpert as I am.

First, data/voice/video integration will occur; indeed, it's already happening. Folks in Los Angeles are speaking with folks in China using ordinary telephones and the Internet. The cable guy in my hometown can hook me up tomorrow with a line that connects me as easily to the Web as it does to "Seinfeld." Very soon I'll be able to make phone calls over it, too.

Second, the integration will occur on Cisco's home turf: a packet-based forwarding architecture rather than the circuit-switched architecture of voice telephony. The volume of data and fax traffic has surpassed voice traffic over telephone lines. Sooner or later -- and probably sooner if Cisco has anything to do with it -- voice traffic will occur over networks well-suited for data transmission rather than data traffic occurring primarily over a system designed for phoning Aunt Millie in Peoria.

Third, Cisco delivered the message last night that in its usual style the company would prefer to partner with others in achieving a win-win solution for everyone. The Kid already has strategic partnerships in place on two continents with major manufacturers of traditional telephony equipment. Cisco would very much prefer to establish a similar partnership in North America with Lucent (NYSE: LU) or Northern Telecom (NYSE: NT). But if the Lucents and Nortels can't grasp the wisdom of such partnerships, then Cisco intends to go ahead regardless. Really.

As a Cisco shareholder and as an eager user of the new technologies, I can't wait to see what happens next. And to think that for around sixty-five bucks a stub, you and I and anyone who cares to can own a piece of the action.

Wow.

FoolWatch -- It's what's going on at the Fool today.


TODAY'S NUMBERS
Stock  Change    Bid 
 ANDW  +  1/2   29.13 
 CGO   +  3/16  22.94 
 BGP   -  1/4   32.44 
 CSL   +1 1/4   46.56 
 CSCO  +1 1/2   64.50 
 FCH   +  3/16  37.00 
 
                   Day   Month    Year  History 
         BORING   +0.88%  -1.75%  -1.75%  23.62% 
         S&P:     +0.09%   3.76%   3.76%  61.98% 
         NASDAQ:  +0.84%   7.01%   7.01%  61.43% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     32.44   188.17% 
   6/26/96  150 Cisco Syst    35.93     64.50    79.50% 
   8/13/96  200 Carlisle C    26.32     46.56    76.88% 
   1/21/98  200 Andrew Cor    26.09     29.13    11.63% 
    3/5/97  150 Atlas Air     23.06     22.94    -0.52% 
   11/6/97  200 FelCor Sui    37.59     37.00    -1.57% 
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  12975.00  $8472.51 
   6/26/96  150 Cisco Syst  5389.99   9675.00  $4285.01 
   8/13/96  200 Carlisle C  5264.99   9312.50  $4047.51 
   1/21/98  200 Andrew Cor  5218.00   5825.00   $607.00 
    3/5/97  150 Atlas Air   3458.74   3440.63   -$18.11 
  
   11/6/97  200 FelCor Sui  7518.00   7400.00  -$118.00 
  
                              CASH  $13182.97 
                             TOTAL  $61811.10