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Cisco a 'Statistical Bet'

Jason Stipp

Question: What is your investment case for Cisco?

Tom Shrager: This for us is simply a statistical bet. I mean since the company has close to $4 a share in cash. If they hit their earnings, it's anywhere between 6 and 7 times earnings. It has huge market share in its main product. The end markets, if you look at what Bernstein says, are going to grow in the low double-digits. So the wind if at you back. That kind of an investment.

We can't claim that to know which new router or switch is going to win out huge market shares, 50%-70% in different product lines. There's the network effect of that, the software effect acting as a barrier to entry. But it's a competitive business; every business is competitive.

Will Browne: When we look at a business and want to make an investment--you think about the risk in it--there are two sort of broad-brush components to that. One is the financial risk. What's the likelihood, that I open the Financial Times and find out the creditors own the business, that's the risk. The other risk is, I open the newspaper and find out that they've been leap frogged.

Now, the first part of the Cisco analysis is really simple. There is a business with multiple positives: virtually no net debt, in fact $4 or $5 or $6 in cash; 10 times earnings; generates cash; very high return on capital; 60%-plus market share; and would appear that there is some difficultly for customer switching. So what's the problem?

So, section one of the analysis is easy. Section two is more difficult. That is, for us, and maybe it's our limited, if you will, abilities, it's much easier to get your arms around the prospects for Johnnie Walker for us. That's why it's easy for us to own more Diageo than it is Cisco. Cisco is one of these businesses that is going to be continually under the microscope for us, as you constantly go over perhaps too much data about a shift in the market share.

The bet is that this has become a market share business. Cisco owns such an enormous part of it that the company will remain competitive and tough, and while Cisco gets eaten a little bit at the edge, it have the ability to come up with the products and hold on to most of what it has. And every day everybody talks about JDS Uniphase, Juniper Networks got a little bit of this, or someone got a little bit of that or they lost this good software guy. And there is a lot made out of that.

You can probably drive yourself insane looking at it, but at this point in time, if we have $100 under management, for $1.50 of our portfolio--and this is in global or domestic, not international--we are comfortable at this point, but we are not putting it away and going to sleep like we might with somebody that's making soapsuds.