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Stock Analyst Update

Even Cisco's Not Immune to Slowing Economy

Most of the bad news was in the stock, which should limit downside.

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What Happened?
It was bound to happen. Cisco (CSCO) finally missed a quarter. The networking equipment giant reported earnings of $0.18 per share, up a solid 50% from the prior year, but $0.01 per share less than the Wall Street consensus. Revenues of $6.7 billion were up 55% from last year and up 4% from the October-quarter. Again, this performance was extremely strong--but weaker than most published estimates, and a noticeable deceleration from last quarter's incredible 66% growth. Cisco lowered near-term guidance as well. Revenues for the next two quarters are expected to be flat to down slightly from the January quarter, while earnings will be pressured by higher inventory carrying costs and a modest increase in operating expenses (at least until the company's hiring freeze takes full effect). The company expects revenue growth of 40% for fiscal 2001 (ending July) and, assuming a rebound in the U.S. economy later in the year, healthy 30%-50% top- and bottom-line growth for fiscal 2001. 

What It Means for Investors
While Cisco's earnings miss and near-term outlook are disappointing, the news is not all that shocking. After all, earnings blowups at most of its major competitors (as well as assorted other tech bellwethers) and recent cautious comments from CEO John Chambers were obvious tipoffs. It's not Chambers' fault that analysts' estimates have barely budged since he began throwing cold water on the firm's previous guidance based on signs that the U.S. economy was slowing much faster than expected. While the shares will undoubtedly react poorly to the announcement, we think most of the bad news was already baked into the stock.

Jay Ritter does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.