Cisco Shares — 3 Pros, 3 Cons

This week, Cisco (Nasdaq: CSCO ) CEO John Chambers, emailed a memo to his
employees and was quite frank.  He mentioned how the company has not been able
to make bold changes" and has "lost the accountability that has been a
hallmark of [its] ability to execute consistently." Shareholders can certainly
understand.  Over the past five years, the stock price has sustained an annual
rate of return of -4.44%.  In fact, the shares have gone down about one-third
in the past 12 months. So far, the response to Chambers' letter has been
encouraging.  The stock price spiked nearly 5% before a pullback of about 1% on
Thursday. But is this a relief rally or the start of something real?  Here's
a look at the pros and cons. Pros Must-have products. Cisco makes technology
that is at the foundation of the Internet and other communications.  The main
offerings include routers and switches, which are highly sophisticated
technologies.  At the same time, it's expensive and even risky for customers
to move to other vendors.  Thus, the customer lock-in is significant.  Cisco
still commands 70% of the market and gets juicy margins. Cheap valuation. All in
all, Cisco looks like a deep value play.  The price-earnings ratio is a measly
13.  And, if you subtract the $40 billion in cash from the balance sheet, the
multiple is only 8. Spinoffs. For two decades, Cisco has been an M&A machine. 
It has been a way to dominate markets and increase innovation.  However, some
of these deals have not performed well, especially in those segments that are
far removed from the core business.  This appears to be the case with the
consumer division, which includes products like the Flip camera and the Linksys
offerings.  They have small margins and stiff competition.  In other words,
Cisco has an opportunity to spin off these assets and improve its focus. Cons
Slow moving. The layers of management and corporate structure look like a 1980s
Soviet system.  Keep in mind that Cisco has 59 internal committees.  With such
complexity, how can this keep the company on the cutting edge?  As a result,
Cisco has seen various high-level executive departures, such as its chief
marketing officer, Susan Bostrom.  Perhaps the person who should depart is
Chambers.  While he led the company through its massive growth spurt in the
1990s, his managerial skills have proved lacking.  In fact, there is buzz that
activist shareholders may stage a proxy fight to shake-up the senior management.
Competition. It is amazing that Cisco has maintained its lead in the switching
and router business.  But nothing lasts forever.  The fact is that smaller
players like Juniper Networks (Nasdaq: JNPR ), Huawei and Acme Packet (Nasdaq:
APKT ) are making inroads into the business. No takeover value. Cisco has a
market cap of roughly $100 billion.  This means it would be nearly impossible
for a leveraged buyout or an acquisition from another company. Verdict True,
Cisco has a dirt-cheap valuation.  The problem is that a stock can remain at
such levels for a long time.  Just look at other tech laggards like Microsoft
(Nasdaq: MSFT ) and Intel (Nasdaq: INTC ). Essentially, Cisco needs to give a
reason for investors to get excited.  Unfortunately, the company has waited too
long to take action.  To restructure things, there will need to be many tough
decisions which will involve spinoffs, cost cuts and the elimination of various
businesses.  Yet Chambers letter was fuzzy about the strategy. In addition, the
core switching and router business is fairly mature and will not provide the
kind of growth investors are looking for.  Adding things up, it looks like the
cons outweigh the pros on the stock. Tom Taulli's latest book is "All About
Short Selling." His Twitter account is @ttaulli.  He does not own a position
in any of the stocks named here.