Despite better-than-expected results and rosy comments from analysts, Cisco Systems Inc. shares got roughed up again yesterday, leading the tech sector sharply lower.
Despite the reiteration of "buy" recommendations from big and smaller brokerage firms alike and strong third-quarter results, shares of the computer networking company dropped $4.25 (U.S.) to $58.50 on the Nasdaq Stock Market. Earlier in the session, the shares traded as low as $58.12.
Trading was uncommonly active at 91.6 million shares, compared with a daily average of 52 million.
Cisco, Nasdaq's most actively traded stock, had a profit of $1.03-billion or 14 cents a share in the three months ended April 29, up from $649-million or 9 cents a year earlier. The latest figure excludes acquisition and stock option costs and a $109-million investment gain.
The share profit was 1 cent above the First Call/Thomson Financial consensus view of analysts.
Including the unusual items, Cisco earned 9 cents a share.
The news promoted a number of analysts to issue upbeat comments on the San Jose-based company, including Lehman Brothers, PaineWebber Inc. and Gerard Klauer Mattison & Co.
And at least two analysts raised their 12-month price targets for the company. Nikos Theodosopoulos of UBS Warburg LLC boosted his target to $85 from $82, and Walter Piecyk, who follows Cisco for PaineWebber, increased his to $108 from $100.
Martin Pyykkonen, an analyst with CIBC World Markets Inc., attributed yesterday's slide in Cisco in part to overall market conditions. "Cisco's results as far as the quarter that they reported and their outlook from a fundamental standpoint really do not have any flaws," he said. There was no negative news, he added.
"So the only explanation really is a valuation question, because the stock does have a premium valuation to the broad market and to a lot of other tech stocks," said Mr. Pyykkonen, who has a "buy" rating on Cisco.
His $75 price target implies a price-to-earnings multiple of 110 times the 2001 earnings estimate, he said. "On sunny days when the market is in a good mood, that is a tolerable multiple: On darker days and everyone waiting for the [U.S. Federal Reserve Board]and everything else that is causing nervousness, it seems like a rich multiple."
The multiple was even higher when the stock stood at its 52-week high of $82 on March 27. The 52-week low was $25.93 on May 26, 1999.
Cisco's valuation has been front and centre ever since influential business weekly Barron's questioned Cisco's pricey valuation and its strategy of expanding through acquisitions.
Cisco's chief executive officer, John Chambers, told a conference call that the company has had more difficulty getting parts for its equipment than it had in the past, and some people suggested that, too, may have depressed the stock price yesterday.
Andy Schopick, who follows Cisco for Nutmeg Securities Ltd., says parts shortages have been evident throughout the industry because of the strong demand for networking products. "It is a question that has come up with a number of other companies in technology," he said.
But it doesn't appear at this time that it will prevent the company from achieving analysts' expectations going forward, Mr. Schopick said. He recommends purchase of the stock by long-term investors, but for the short term, "I would be at a 'hold' position at this time due to market conditions and concerns about valuations."