Cisco Systems is writing off well over 60% of its inventory, trying to use the one-time write-off so that they'll actually be profitable this quarter before the charges!" Do you buy it? I don't. This is a company that suffers from a tremendous lack of shareholder-orientation. A private company in the public domain, existing to take advantage of shareholders, not to benefit shareholders. While John Chambers, the CEO, states that the hardest thing he has had to do is lay off these thousands of workers, well, that's only because he and his IR crew let only trusted "friendly" analysts in on the quarterly conference calls. Let's look at what Cisco is doing: Workforce reduction charge. Cisco is taking at least a $300 million charge to lay off more than 8,500 people. That approaches one-quarter of the work force and tells us that this is not by any means a temporary lull in business. In fact, this tells us that Cisco really does not know whether or not the long-term growth rate can even approach 30%-50%, despite its assertions to the contrary. If Cisco really believed this, they would plan for it. And a 25% work-force reduction isn't planning for it. Consolidation of excess facilities. Here's another $500 million out the door and another sign that 30%-50% growth "long-term" is a pipedream. Cisco was to build a brand-spanking new campus about a mile and a half from my house here in south San Jose. Portions of it were supposed to be modeled after snooty Palo Alto's downtown area. Plans on hold indefinitely, now. Poor Cisco. They couldn't even build their very own trophy campus like all the other flash-in-the-pan never-can-fail growth stories got to do before they went bust. How unfair! Asset impairment charges. Bye-bye to $300 million or so. This is a goodwill write-off, which means, "We overpaid at least $300 million for acquisitions over the last few years." Honestly, this number seems low. Expect more where this came from -- only tremendous mind-over-matter denial is keeping Cisco from puking yet again and in greater volumes. Oops, did I almost forget the $2.5 billion charge for inventory write-offs? Cisco would like me to, but Cisco's dreaming again. Read the press release: "Cisco expects to take a restructuring charge of $800 million to $1.2 billion" -- and then lists out the three components of the charge, as I did above. And then it puts an "also" in there. As in, "Oh, by the way, there's another $2.5 billion coming out of inventory, but don't pay too much attention to that." That is over 60% of inventory vaporized with a simple charge. That is very real money out the door -- costs that Cisco experienced but will never recoup. To put in more real terms, remember those $3.7 billion in profits Cisco said it earned over 1995-1998? Well, Cisco has gotten so big that it can now take a one-time charge to eliminate 1995-1998 from the record books. Impressive, huh? Actually, it gets more impressive. If one accounts for the shareholder dilution from massive options compensation abuses, you could potentially add total income from 1991-1994 to the write-off. Oh, numbers to warm a shareholder's heart…Now, we await the repricing of options, or shall I say, "sheer ecstasy waiting in the wings."
So everything is back to normal. Cisco Systems (CSCO, news, msgs) is back to beating estimates by one penny, and the Nasdaq ($COMPX) is on a collision course with the moon, if not Pluto. The market once again has proved that if we all just coordinate our fears of missing the next market rally, we can all indeed be happy again -- and untold riches will once again flow from the friendly exchanges we know as the Nasdaq and the New York Stock Exchange. Or so CNBC and every investment house from here to Hong Kong would like to have you believe. And believe me, they cannot wait for you to start believing again. In truth, my previous rant against Cisco still stands. Cisco wrote off nearly eight years of options-adjusted profits and then has the nerve to beat drastically reduced "pro-forma" estimates by a penny? Nice try, guys. Cisco did lose billions of dollars this past quarter. If not taken out of the "pro forma" income statement, those billions surely come out of the balance sheet -- and shareholders' equity, i.e., shareholders' hides. Realize that when Cisco uses "pro-forma" in its recent release, Cisco is not accounting for a merger or a business segment spinoff, but simply adjusting for the eradication of its own assets by hitting the delete button. The magic here is that Cisco didn't throw $2.25 billion in inventory in the trash. True, discounts on such equipment are running in the mid or high double digits. But now that inventory is written down by billions, Cisco has the ability to "earn" back hundreds of millions, or even billions, simply by selling its inventory at a premium to its new, written-down value as represented on its New Economy balance sheet. After writing off Cisco's entire year-end inventory, CEO John Chambers -- ever the salesman -- excuses himself by claiming that this is the fastest any company his size has every decelerated. Certainly a dramatic statement -- and one that helps shift blame from an inexplicably shortsighted CEO's shoulders to that of uncontrollable external forces. A "100 year flood", in the words of one senior Cisco exec. When in doubt, blame the weather -- or create a weather analogy so people understand that we are surely talking about forces of nature here. Nothing a human could control. As to the claim that Cisco has fallen on rougher times than any previous business enterprise its size, it may be true in nominal dollar terms. But in real dollars, Cisco has some competition. And to the extent that this bit of CEO insight is indeed true, how might it affect the prevailing wisdom regarding Cisco's sustainable competitive advantage and long-term profit prospects? Another way of phrasing the excuse is that never in history has such a large company risen so fast only to fall so hard. Or, that to fall this hard, the rise must have been historically unprecedented and the business model eminently more tenuous than widely believed. In short, Cisco lived and breathed the bubble that is now burst. Indeed, what we are seeing now is not an era-defining downturn, but simply the expiration of an era-defining asset bubble. What we saw at the tail end of the 20th century rivals the worst excesses of the 1920s in the United States and the 1980s in Japan. The precedent is not a kind one for bulls. Irrefutable value will remain attractive. I will continue to buy shares in companies that I would like to own outright. In that vein, I will add to the position in Grubb & Ellis (GBE, news, msgs). Buy 500 shares at $4.50 limit, good until canceled. Cisco Systems, market capitalization $141 billion, reported combined earnings for the last two years of $1.66 billion, and it is uncertain how or when Cisco will grow again. Moreover, it is possible and maybe probable that Cisco will write off $1.66 billion as a one-time charge sometime in the next few years. As usual, details regarding Cisco's options compensation programs are scarce. So, which is the bigger risk: owning Cisco or not owning Cisco? One need not be short Cisco to experience the risk of not owning Cisco. For professionals, performance is benchmarked. That is, performance is relative. In the relative performance game, one is effectively short every stock not in one's portfolio that is nevertheless a part of the benchmark. To illustrate, a 100% cash position benchmarked against the S&P; 500 Index is 100% short the index in the relative performance game. If the S&P; 500 rises 10%, then in the relative performance arena the cash portfolio is down 10%. This is how Wall Street works. So who in their right mind would short Cisco now? Virtually no one. Despite mustering every ounce of confidence possible, most analysts, portfolio managers, economists and corporate executives have no clue as to when either the economy or Cisco will again rebound. And on the off chance that the rebound occurs next month, well, better not be short Cisco. What we have here is greed overruling fear, despite the fact that for a financial buyer -- a buyer that does not think strategically but rather thinks in terms of pure proven cash flows -- the public stock market offers precious few opportunities. And almost none of them are in big caps. Cisco does not qualify. I have given some reasons why in previous journal entries. This lack of value should be troubling to thoughtful investors. Tremendous liquidity continues to grace the stock market. Hence, when investors flee from growth, they rush to value. Any big publicly traded company with a low price/earnings ratio or low price/book ratio and without obvious warts has seen its stock have a big run recently. Indeed, the bull run for value that started last fall has continued right up into the present. Now, however, most stocks are at least fairly valued. I would argue most remain overvalued. Given the current valuation scenario across the market -- and evident in my daily reviews of anything and everything that looks either undervalued or overvalued -- investors would do well to start replacing fear of missing a rally with fear of further capital loss. Before the bear goes back into hibernation, the time will come when fear overrules greed. We are not there yet. Though we may soon be. With little doubt, this round has been a disappointment. Now that I'm a short-timer, it seems hazardous to enter a position now, knowing that it is only a guess where the price will be in a few weeks when the totals are recorded for eternity. Nevertheless, the spirit of the Strategy Lab is not to remain idle. So here goes.