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Cisco seeks new businesses for stronger growth

By Robert MacMillian / Reuters
November 7, 2005

Cisco Systems Inc. (CSCO.O: Quote, Profile, Research) is on track to report solid quarterly revenue on Wednesday, but also is trying to inject life back into its stock, which investors increasingly see as a reliable yet staid portion of their portfolios.

Sales for the company's 2006 first quarter are expected to hit $6.6 billion -- strong, but flat compared to the previous quarter. That is too slow for investors who seek edgier stocks when they invest in the technology market, analysts said.

"People come to tech for that extra-special sizzle, not for the steak," said Stephen Kamman, an analyst at CIBC World Markets. "By buying into Cisco they're buying into a market that's more moderate."

Five years ago, Cisco nearly hit $80 a share as it came to embody the story of the technology boom. Unlike many of the firms that vaporized in the bust, the company prospered, but it did so by taking a more conservative approach to its business.

With that change, the stock eventually settled where it is today, trading in the neighborhood of $17 a share.

The company is looking to its six "advanced technology" businesses as a way to shed the perception that its shares are on their way to being considered the technology industry's version of a "value stock."

These areas, including home networking and network security products, will account for 18 percent of Cisco's sales in 2006, but 40 percent of growth, Bank of America Securities analyst Tim Long said in a research note.

"Despite the likelihood of a conservative outlook, we believe better momentum in the company's growth areas could start to change the 'lack of growth' sentiment that has weighed on the stock," Long said.

Some analysts said that Cisco's size -- the company has about 40,000 employees and is worth more than $112 billion -- will make it hard for even a good growth opportunity to propel the stock higher.

Ehud Gelblum, an analyst at J.P. Morgan, said that Cisco is following a natural pattern for many successful companies.

"You become a better bet for conservative investors," he said. "U.S. Steel was a growth stock in 1918."

Cisco does 70 percent of its business on corporate sales of routers and switches, the products that direct data on the Internet.

The company's shares trade at about 18 times earnings, slightly above the S&P 500 Index average but below its peers on the U.S. Telecommunications Equipment Index, where shares are trading at an average of nearly 23 times earnings.

Earnings per share for the first quarter are expected to fall a penny to 24 cents, according to Reuters Estimates. Cisco said it forecasts revenue to rise between 10 percent and 12 percent in 2006.

The communications equipment sector performed fairly well during its most recent round of earnings reports. Cisco competitor Juniper Networks Inc. (JNPR.O: Quote, Profile, Research) saw revenues rise 45 percent, while Tellabs Inc. (TLAB.O: Quote, Profile, Research) revenues climbed 64 percent.

Cisco was down a penny at $17.86 in after-hours trading on INET