5 Reasons To Dump Cisco Stock

Cisco Systems Cisco Systems, the $48 billion (12 months revenues) network equipment maker in which I have no financial interest, has been dead money since it peaked at $82 in March 2000. While he drove the stock's phenomenal rise during the 1990s, I am a little surprised that the 65-year-old John Chambers has held onto his job since then. And if he survives Cisco's latest earnings report — instead of being offered a chance to retire early — it will be one more reason to give up on Cisco's stock.

Cisco has lost the ability to adapt effectively to changing technology. For my first book, The Technology Leaders, I interviewed former Cisco chairman, John Morgridge. He articulated the logic behind the acquisition strategy that helped keep Cisco from falling behind new technology that its customers wanted.

Morgridge had worked as a sales person for Honeywell and he saw that sales people were loyal to their customers. So if a new company came out with a product that their customers liked better, the sales people would leave Honeywell and sell the rival's product.

Morgridge decided that to keep the best sales people, Cisco would need to acquire the upstarts whose products customers were buying.

Cisco's latest earnings report features weak results, a lame forecast and significant job cuts that suggest it has lost that ability.

Its weak results were slightly better than expected. Its fiscal fourth quarter revenue of $12.4 billion was down 0.5% from the year before but $300 million higher than analysts expected, according to Thomson Reuters Thomson Reuters I/B/E/S. While its earnings of $2.8 billion were flat compared to the year before, its adjusted earnings per share of 55 cents beat the consensus forecast by two cents.

No relief is in sight for growth-hungry investors. Cisco forecast current quarter EPS between 51 cents and 53 cents and predicted flat to 1% growth for the period.

John Chambers (Photo credit: Wikipedia)

And Cisco is continuing its annual string of job cuts. In the last three years, Cisco has announced 21,000 firings — 11,000 in 2011; 4,000 a year ago, and 6,000 announced on August 13 (the latest job cut amounts to 7% of its 74,000 person workforce and will result in restructuring charges of $700 million).

On its conference call, Chambers told analysts, "The market doesn't wait for anyone. We are going to lead it, period. The ability to do that requires some tough decisions. We will manage our costs aggressively and drive efficiencies."

Here are five reasons to dump Cisco stock:

1. Bad geographic bets

Cisco has placed its geographic chips on countries that used to be hot but now are not. In emerging markets, Cisco revenue plunged — down 23% in China and 13% in Brazil. And Chambers is pessimistic: "We don't see emerging markets growth returning for several quarters and believe it could get worse," he said in the conference call.

2. Poor product line mix

Moreover, its biggest product lines are declining while its smaller ones are growing faster. High-end routers fell 7% and switches were down 4% while data center revenues soared 30% and security sector revenues climbed 29%.