We are not much for technical analysis here at the Fool -- in fact, we stand by our conviction that "reading the charts" is just so much hocus-pocus.
You probably heard that the market is overbought and due for a 10% correction. Funny, how the charts predict the correction but never the cause. In fact, stock markets are always due for a 10% correction. Long term, they are rational, but near term, they jump around in reaction to news and even the fear of news.
Today, it was technology that took it on the chin, following some cautious comments out of Cisco. Tomorrow it will be something else. Will it be good or bad? Fifty-fifty: You have much better odds of finding a company you love at a great price.
In today's Motley Fool Take:
- Cisco Jumps, Slips, Falls
- Shameless Plug: Fat Dividends Now
- Burnt Ciena
- Quote of Note
- Altria's Faustian Bargain
- Discussion Board of the Day: Women & Investing
- More on Fool.com Today
Cisco Jumps, Slips, Falls
The good news from Cisco's
Another number showing substantial health is free cash flow. The company turned in free cash flow of $2.2 billion for the first six months of the year, up from $2 billion a year ago. This number comes with a bullet, though: every bit of the growth in free cash flow can be attributed to a 2,700% increase in tax benefits for stock options. It looks like Cisco employees are taking the price-rise opportunity to exercise some of the enormous stock option grants for which the company is known. Regardless of what adjustments you would make to the reported number, this result is quite strong.
One of the brightest stars for Cisco this quarter was its Linksys division, acquired in 2002. The wireless networking outfit showed a revenue increase of more than 39% to $165 million, as the concept of wireless networks in home and office has begun to fully achieve acceptance in the marketplace.
Many Cisco reports are likely to suggest that the company's price movement (it was down strongly after-hours) is because its earnings were lower.
Cisco's earnings came in lower due to an accounting change of $567 million from the treatment of stock options granted to employees of acquired startup Andiamo Systems. Accounting adjustments are just that -- adjustments. So only as much as investors only look at the bottom line and say "they earned less" and run to the exits would this be in any way a plausible explanation. This may be the case with some, but it's not very smart. Earnings at Cisco -- including all of the adjustments both required and not required by accounting practices -- were fine.
Then again, $567 million in charges for stock options for a startup?
Much more to the point was the comment from Cisco executives that they were finding corporate executives "more cautious" about technology spending than typical "at this stage of a recovery." Which is a little funny since as a child of the 1990s, Cisco would have never seen a situation like this before. So the comment struck me as a little odd, but it had to strike Cisco investors as shocking. At free cash flow ratios approaching 40 and operating earnings multiples approaching the same level, Cisco isn't priced for "more cautious" -- it's priced for "full steam ahead."
Cisco didn't deliver this. The recovery simply isn't as strong as it would need to be to justify prices. Investors discounted a growth rate that the company could not provide. There may be other reasons for the stock's probable drop today, but none bigger than that one -- and that's not the company's fault by any stretch.
Shameless Plug: Fat Dividends Now
Just as many of us crave Krispy Kreme's
This article was amended on Feb. 6, 2004 to reflect Ciena's revenue predictions and clarify that the earnings guidance was given by analysts.
Boy, is Ciena's
Barely a month ago, the Maryland-based telecom equipment manufacturer was predicting up to a 10% sequential rise in revenues for its first quarter of 2004. Yesterday, however, that expectation was reversed when management instead warned of a 6% drop. What's more, it appears that the GAAP loss may come in a hair worse than the Wise men's prediction of $0.08 per share.
Ciena is blaming the mess on a single customer's tardy payment. Or, in corporate-speak, on: "formalities and processes associated with revenue recognition." That demonstrates just how precarious the state of the ballyhooed "telecom recovery" actually is.
Read between the lines of what is happening at Ciena, and you will see the true state of affairs in the industry. First, the strength does not appear to be as widespread as some analysts are predicting. In Ciena's case, all it took was a single customer's accounts payable department to turn a vendor's up quarter into a down quarter. There was a notable absence of other clients whose orders might have been fulfilled and whose payments might have been collected ahead of schedule to make up for the one slowpoke.
Second, judging by Ciena's performance, the telecom equipment makers still lack the kind of influence over their customers necessary to demand timely payment. That lack of collecting power can translate into lack of pricing power, as well, and keep margins down. And even if it does not, it almost certainly will damage the equipment makers' Foolish Flow ratios. Of course, it is also possible that Ciena's faux pas will prove to be an isolated incident, but it may be worth keeping an eye on competitors such as Cisco Systems
Third, Ciena appears to be making the time-honored tech-company mistake of projecting revenues before they are certain to come in. Granted, it caught and corrected the mistake before it came time to release the actual quarterly earnings. But when a company starts trumpeting every single sale, or previewing good news before it is actually "news," look out, Fools.
Quote of Note
"If everything seems under control, you're just not going fast enough." -- Mario Andretti
Altria's Faustian Bargain
The seemingly endless parade of tobacco litigation against Altria has overshadowed its operations for some time now. The second half of the year, however, saw positive legal developments, with a number of suits against Philip Morris USA decertified as class actions. At the same time, Altria's taken on considerable debt to cover settlement costs and appeal bonds related to all this litigation. At $19 billion, its long-term debt is 50% greater than it was just four years ago. The debt-to-equity ratio peaked at 1.9 in 2000, but has since fallen to 0.98, thanks to a reduction in share buybacks.
Into this mix of endless litigation and rising debt load rides a potential white knight. Altria has thrown its support behind legislation that would allow the Food and Drug Administration to regulate tobacco as a drug. The government would then take responsibility for policing the health effects of tobacco and establishing guidelines for production and sales, shielding Altria from further health-related lawsuits. Management seems to believe this is the best way to preserve shareholder value under current conditions.
Understandably, regulation looks like a saving grace to many investors, especially after the tobacco industry recently lost another round in court to the government (a U.S. district judge rejected a request to throw out the Justice Department's $289 billion suit against Altria and others). Yet by supporting FDA regulation, Altria takes one step closer to the eventual outlawing of tobacco.
With a strengthening balance sheet, several successes in the courts this past year, and a turnaround in operations, is now the time to make this deal? Regulation may stave off the lawsuits, but like Faust's bargain with the devil, it may be at the expense of the company's soul.
Discussion Board of the Day: Women & Investing
Do you think gender-geared sites are at an advantage when it comes to attracting sponsors? Targeted advertising is certainly in fashion. But are there gender-based differences in investing styles as well? All this and more -- in the Women & Investing discussion board. Only on Fool.com.
More on Fool.com Today
How is your tax bill calculated, and who benefited most from last year's cuts? Find out in Taxes, Cuts, and Politics... In 2002, ACLN's CFO was embroiled in a massive financial fraud. Now, he's CEO of an accounting firm. Bill Mann has the story in Hiding From ACLN.
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