Cisco (CSCO) Positioned Better Than Ever

Since history tends to repeat itself, its a good thing that Cisco (NASDAQ: CSCO) has learned from the past. According to a Wall Street Journal article today, Cisco is positioning itself better than ever to rebound from the recent market recession, learning from tactics employed in the dot-com bubble during 2000 - 2001.

The company honed a tactic used in the dot-com bust, when it cut 18% of its workforce in March of 2001, early, but it wouldn't have to make the same tough decision again later on in the year. Also, Cisco began to make investments in new areas, such as the wireless Internet business. This is probably one of the most challenging things to do, as, like a turtle, companies tend to retreat back into their shells until things begin to clear up.

No risk, no reward though, right?

Executives at Cisco complained, after the fact, that they were too cautious on picking up new acquisitions when the prices were right. Over the past year, though, the company made moves early: they acquired Pure Digital Technologies last March for $590 million, made a $3.4 billion bid for video-conferencing company Tandberg ASA, and got Starent Networks Corp. in October 2009 for $2.9 billion.

The company also expanded its internal start-ups, from 20 to 30, and expanded the number of new businesses that it is funding from 20 to 30. Cisco believes that each one of these can turn into a $1 billion business.

Despite some changes over the past 10 years, 45 of the 65 executives that were around for the dot-com bubble are still with the company, giving Cisco an unparalleled advantage to cope with the current economic slump.

The initiatives appear to be faring well for the company. Their profit for Q210 was up 23% to 1.9 billion.

Some critics say that in Cisco's effort to expand, it lost focus on its core business, and has since given up some market share to competitors. The WSJ cites an example of its switches business. Switches are add about 35% to Cisco's revenue, and are devices that direct network traffic. Cisco has a market share in this category of 71.3% in Q408, and now sees a share of 67.7% for Q409, about a 5.1% drop.

Cisco began bracing for an economic downturn in 2007, when CEO John Chambers became one of the first to warn about impending economic problems. In 2008, Cisco announced a plan to reduce expenses and freeze hiring, all while the company was still posting record revs. Then in February 2009, about half a year after the financial crisis officially began, Cisco announced that they were going to layoff 2,000 employees.

Chambers said that he sacrificed some short-term profit for a chance to set the company up well for the long haul. They spent $5.2 billion on R&D in 2009, down from 2008, but at a higher percentage of revenue, echoing steps taken in 2002.

Marthin De Beer, the executive in charge of emerging business, said that not everyone at Cisco was kosher with investing in new businesses at a time of uncertainty, but they "knew the upturn would happen."

Cisco recently reported their Q210 earnings on February 3, 2010. For Q310, the company sees sales up 23 - 26% over last year. The Street consensus calls for an EPS of $0.38 and revs of $10.20 billion. The FY10 ESP consensus is $1.54 and revs of $39.54.

Cisco currently has a forward P/E ratio of 16.8x FY10 EPS estimates, compared to 28.1x for Alcatel-Lucent (NYSE: ALU), 11.7x for Hewlett-Packard (NYSE: HPQ), and 25.2x for Juniper Networks (NASDAQ: JNPR).

Shares of the company also gained about 8.5% since opening January 4, 2010.

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